Company response strategies

Preparation

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 the business judgement rule, Japanese courts may sometimes carefully scrutinise the context and situation surrounding the board’s decision. 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.

Defences

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

Based on the report published by the Tokyo Stock Exchange in March 2017, more than 12 per cent of companies listed on the Tokyo Stock Exchange have adopted the Japanese rights plan or ‘large-scale share purchasing policies’, even though the ratio has been gradually decreasing (the ratio is higher among larger market-cap companies in comparison). Under such a 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 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 other than the violating raider; thus, the raider’s shareholding will be diluted.

Other than such a plan, structural defences such as dual capitalisation are rarely possible, although one company (Bull-Dog Sauce) was successful in this, because the defence measure was fair and reasonable. Though 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 TOB, the Supreme Court stated in obiter that such a rights plan had a net positive effect, as it heightened 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.

During 2017, there were no changes in the laws and regulations or court rulings to limit the anti-takeover defences available to a company particularly because of the listing rules. In addition, as the term of office of a director at a Japanese listed company is one or two years depending on its governance structure, a staggered board is not an effective measure in practice.

While there are few cases where the validity of the rights plan or anti-takeover defence measures has been tested, in the Bull-Dog Sauce case, the Supreme Court recognised the validity of an anti-takeover defence (similar to a poison pill in the United States) implemented by the target.

Reports on 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 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.

Private settlements

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?

As mentioned in question 10, ‘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 they will sometimes launch a formal shareholder proposal at a general shareholders’ meeting, the company sometimes agrees on the proposal without the proxy campaign.