chambers global practice guides japan .pdf · chambers global practice guides contributed by mori...

JAPAN

LAW & PRACTICE: p.3Contributed by Mori Hamada & Matsumoto

The ‘Law & Practice’ sections provide easily accessible information on navigating the legal system when conducting business in the jurisdic-tion. Leading lawyers explain local law and practice at key transactional stages and for crucial aspects of doing business.

DOING BUSINESS IN JAPAN: p.283

Chambers & Partners employ a large team of full-time researchers (over 140) in their London office who interview thousands of clients each year. This section is based on these interviews. The advice in this section is based on the views of clients with in-depth international experience.

CHAMBERSGlobal Practice Guides

Contributed by Mori Hamada & Matsumoto

Corporate M&A

2017

JAPAN

LAW & PRACTICE: p.3Contributed by Mori Hamada & Matsumoto

The ‘Law & Practice’ sections provide easily accessible information on navigating the legal system when conducting business in the jurisdic-tion. Leading lawyers explain local law and practice at key transactional stages and for crucial aspects of doing business.

Law & Practice JaPaNContributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira,

Kenichi Sekiguchi, Akira Matsushita

3

Law & PracticeContributed by Mori Hamada & Matsumoto

cONteNtS1. Trends p.5

1.1 M&A Market p.51.2 Key Trends p.51.3 Key Industries p.5

2. Overview of Regulatory Field p.52.1 Acquiring a Company p.52.2 Primary Regulators p.52.3 Restrictions on Foreign Investment p.52.4 Antitrust Regulations p.62.5 Labour Law Regulations p.6

3. Recent Legal Developments p.63.1 Significant Court Decisions or Legal

Developments p.63.2 Significant Changes to Takeover Law p.7

4. Stakebuilding p.84.1 Principal Stakebuilding Strategies p.84.2 Material Shareholding Disclosure Thresholds p.84.3 Hurdles to Stakebuilding p.84.4 Dealings in Derivatives p.84.5 Filing/Reporting Obligations p.8

5. Negotiation Phase p.85.1 Requirement to Disclose a Deal p.85.2 Market Practice on Timing p.95.3 Scope of Due Diligence p.95.4 Standstills or Exclusivity p.95.5 Definitive Agreements p.9

6. Structuring p.96.1 Length of Process for Acquisition/Sale p.96.2 Mandatory Offer Threshold p.106.3 Consideration p.116.4 Common Conditions for a Takeover Offer p.116.5 Minimum Acceptance Conditions p.11

6.6 Additional Governance Rights p.126.7 Voting by Proxy p.126.8 Squeeze-Out Mechanisms p.126.9 Irrevocable Commitments p.12

7. Disclosure p.137.1 Making a Bid Public p.137.2 Types of Disclosure p.137.3 Requirement for Financial Statements p.137.4 Disclosure of the Transaction Documents p.13

8. Duties of Directors p.148.1 Principal Directors’ Duties p.148.2 Special or Ad Hoc Committees p.148.3 Business Judgement Rule p.148.4 Independent Outside Advice p.14

9. Defensive Measures p.149.1 Hostile Tender Offers p.149.2 Directors’ Use of Defensive Measures p.159.3 Common Defensive Measures p.159.4 Directors’ Duties p.159.5 Directors’ Ability to “Just Say No” p.15

10. Litigation p.1510.1 Frequency of Litigation p.1510.2 Stage of Deal p.16

11. Activism p.1611.1 Shareholder Activism p.1611.2 Aims of Activists p.1611.3 Interference with Completion p.16

JaPaN Law & PracticeContributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita

4

Mori Hamada & Matsumoto’s corporate M&A team con-sists of approximately 40 partners and 80 associates. The majority of the team is based at the main office in Tokyo, although there are M&A team members at the domestic branch offices in Osaka, Nagoya and Fukuoka, as well as at the international branch offices in Singapore, Shanghai, Beijing, Bangkok, Yangon and Jakarta. The firm has a full-service M&A practice that handles mergers, acquisitions, restructurings and corporate alliances in a wide variety of industries and sectors, including both domestic and cross-border transactions (inbound and outbound), listed com-

pany and private equity and venture capital transactions, friendly and hostile transactions, going-private transac-tions, MBOs, acquisition finance and takeover strategies. In recent years, the firm has been particularly active in cross-border transactions between Japan and South and South-East Asian countries.The firm’s M&A lawyers often team up with lawyers with expertise in other key practice areas in order to assist with M&A transactions involving distressed or insolvent compa-nies, as well as M&A-related litigation and arbitration.

authorsHajime tanahashi is a partner in the firm and has great expertise in corporate, M&A, private equity, venture finance and corporate governance. Tanahashi has also represented various domestic and interna-tional private equity funds. He is the

author of several publications, including ‘Private Equity in Japan: Market and Regulatory Overview’ (co-authored), ‘Comprehensive Analysis of M&A Laws of Japan’ (co-authored) and ‘Cross-Border M&A: Laws, Regulations and Practical Considerations’. Tanahashi is a lecturer at Kyoto University School (2007-), and is a director and member of the Industrial Innovation Committee, Innovation Network Corporation of Japan (2009-). He was admitted to the Bar in Japan in 1992 and in New York in 1997.

takayuki Kihira is a partner and has experience of M&A, corporate and securities laws. In particular, he has extensive experience in cross-border M&A transactions and frequently represents international clients. He was admitted to

the Bar in Japan in 2001 and in New York in 2007. He has authored several publications, including ‘Comprehensive Analysis of M&A Laws of Japan’ (co-authored), ‘Cross-Border M&A: Laws, Regulations and Practical Considera-tions’ and ‘Corporations and Partnerships in Japan’.

Kenichi Sekiguchi is a partner and practises in M&A, and general corporate matters, including corporate litigations regarding M&A transactions. He focuses particularly on transactions involving conflicts of interests such as management

buyouts. He was admitted to the Bar in Japan in 2005 and in New York in 2011. His contributions to legal publica-tions include ‘Doing Business in Japan’ (co-authored), ‘Comprehensive Analysis of M&A Laws of Japan’ (co-authored) and ‘Enterprise Law: Contracts, Markets, and Laws in the US and Japan’ (co-authored).

akira Matsushita is a partner and has expertise in cross-border/domestic M&A, corporate governance, takeover defence and general corporate and securities law matters. He has advised many listed companies that have been subject to

shareholder activism and a hostile takeover, including a proxy fight. He was admitted to the Bar in Japan in 2006 and in New York in 2013. Matsushita has published ‘Comprehensive Analysis of M&A Laws of Japan’ (co-authored), ‘Reconsideration of Regulations for Proxy Solicitation (Volumes 1 and 2) - Based on Proxy Regula-tion in the US’ and ‘Shareholders’ Proposal and Proxy Fight’ (second edition).



5

1. trends

1.1 M&a MarketThe M&A market in Japan continued to grow in 2015. The number of transactions increased by 6.3% from 2014, which represents an increase for four consecutive years, and the value of transactions increased 68.3% from 2014. The reason for the significant increase in value is the increased value of outbound transactions (a 93.9% increase from 2014), includ-ing Tokio Marine’s acquisition of HCC Insurance Holdings and Itochu’s investment in CITIC Limited. As for domestic transactions, both the number and the value increased – by 6.7% and 47.1% respectively – during 2015.

1.2 Key trendsAfter the peak in the Japanese M&A market in 2006, both in transaction numbers and values, the market suffered a downward trend until 2011, but began to pick up in 2012. It appears that growth will continue, given the desire of corporate management in many Japanese companies to in-crease their domestic market share and seek opportunities for growth outside the country.

1.3 Key industriesIn Japan, M&A activity is being seen in a wide range of industries, including consumer goods, financial sectors, chemical and electronics. Among the outbound transac-tions, Japanese insurance companies have been quite active in acquiring overseas companies. In domestic transactions, the increase in mergers and integration among regional banks is one notable trend.

2. Overview of regulatory Field2.1 acquiring a company A company is acquired in Japan either by (i) a share acquisi-tion or (ii) a business (asset) acquisition. This can be accom-plished through either (i) a contractual purchase of shares or business (assets) or (ii) a statutory business combination (or corporate restructuring) conducted pursuant to the provi-sions of the Companies Act (ie a merger, share exchange, share transfer or company split). A forward triangular busi-ness combination (such as a merger whereby a merger sub-sidiary of the acquirer merges with a target company whose shareholders receive the parent’s (acquirer’s) stock) is per-mitted under the Companies Act.

A share acquisition from one or more third parties (other than the company) may be made through either an “on-market” transaction or “off-market” transaction. While the tender offer rules under the Financial Instruments and Ex-change Act (the “FIEA”) do not generally apply to market transactions, an off-market acquisition of shares of a listed company is subject to the tender offer rules if an acquirer seeks to acquire shares in excess of certain thresholds pro-

vided in the FIEA (see a more detailed description of the “One-Third Rule” and other rules in 6.2 Mandatory Offer Threshold).

A share acquisition may also be made by a “share exchange”, one of the statutory business combinations, whereby an ac-quiring company can acquire 100% of the shares of a target company upon a two-thirds shareholder vote. A share ac-quisition may also be made through a subscription of shares issued by a target company. Generally, a listed company can issue shares by a board resolution unless (i) the issue price is a deep discount from the market price or (ii) after the is-suance, the total outstanding shares exceed the authorised number of shares provided for in its articles of incorporation (see a discussion of certain new shareholders’ rights under the amended Companies Act in 3 recent Legal Develop-ments). Even if the board approves an issuance that results in an acquirer holding a majority of the shares of the target company, the acquirer is not required to offer to purchase shares from the minority shareholders.

A business (asset) acquisition is generally conducted through either (i) a contractual buy-sell agreement or (ii) a statutory company split, which is a statutory spin-off procedure. Third party consents are required to effect a contractual business acquisition – for example, consents from counterparties to transferred contracts and transferred employees are re-quired. However, these consents are not statutorily required in the case of a company split. Instead, the Companies Act requires the parties to a company split to comply with vari-ous procedures including the ones for creditor protection.

2.2 Primary regulators The Financial Services Agency (the “FSA”) administers se-curities regulations under the FIEA, including regulations involving tender offers, public offerings and proxy solicita-tions.

The Ministry of Finance, the Ministry of Economy, Trade and Industry and other relevant ministries regulate cross-border transactions under the Foreign Exchange and For-eign Trade Act (the “FEFTA”), including inward/outward investments.

The Japan Fair Trade Commission (the “JFTC”) regulates transactions that substantially restrain competition under the Act on Prohibition of Private Monopolisation and Main-tenance of Fair Trade (the “Antimonopoly Act”).

The Tokyo Stock Exchange, Inc. (“TSE”) and other stock exchanges oversee transactions involving a listed company.

2.3 restrictions on Foreign investment The FEFTA provides some restrictions on foreign invest-ment in certain restricted businesses.


6

A foreign investor is required to file prior notification with the Minister of Finance and the competent minister for the business and wait a specified period (which may be extended up to five months) if: (i) the foreign investor intends to ac-quire shares of a private company (except an acquisition of shares of a private company from another foreign investor) or more than 10% of the shares of a listed company; and (ii) the target company engages in certain restricted busi-nesses identified in the FEFTA, including businesses regard-ing national security, public order or public security. After the review, the ministers may order the foreign investor to change or discontinue the plan of investment. Although a wide variety of businesses are identified as a restricted busi-ness under the FEFTA, orders to change or discontinue an investment have rarely been made.

Otherwise, there are post-acquisition notifications required in connection with acquisitions by a foreign investor. An outward investment by a resident in Japan may also be sub-ject to a post-reporting obligation, a prior notification obli-gation or the approval of the Minister of Finance, depending on the type of business of the investee.

In addition, there are some restrictions on the holding of shares by a foreign investor in a company engaging in cer-tain types of businesses, such as airline and broadcasting businesses.

2.4 antitrust regulations The Antimonopoly Act prohibits any acquisition that sub-stantially restrains competition in a particular field of trade, or which would be conducted by using unfair trade practices.

Potential acquisitions that would exceed certain thresholds require prior notification to the JFTC. In particular, if a com-pany with domestic sales (aggregated with domestic sales of its group companies) of more than JPY20 billion intends to acquire shares in a target company with domestic sales (ag-gregated with domestic sales of its subsidiaries) of more than JPY5 billion, and that acquisition results in holding more than either 20% or 50% of the voting rights in the target company, the acquiring company must file prior notifica-tion of the plan of acquisition with the JFTC at least 30 days prior to the closing of acquisition. If the JFTC determines during this 30-day period (the first phase review) that more extensive review is necessary, it proceeds to a second phase review. The period of the second phase review is up to 120 days from the prior notification or 90 days from the accept-ance by the JFTC of all information which it requests the acquiring company to provide, whichever is the later. If the JFTC determines that an acquisition violates the Antimo-nopoly Act, the JFTC may order the party to take measures to eliminate the antitrust concerns, including a disposition of shares and assets. Similar filing requirements and subse-quent procedures pursuant to the Antimonopoly Act apply

to other means for the acquisition of a target company or its business, such as a merger, company split, share transfer and business/asset transfer.

2.5 Labour Law regulations The Japanese labour law regulations of primary concern to an acquirer are restrictions on the ability of an employer to terminate employment agreements. An “at-will” employ-ment agreement is not legally permitted in Japan. Rather, a dismissal can be found to be invalid if it lacks objectively reasonable grounds and is not considered to be appropriate in general societal terms (Article 16 of the Labour Contract Act). Therefore, an acquirer should be aware that it may be difficult to undertake typical layoffs after the consummation of an acquisition.

3. recent Legal Developments3.1 Significant court Decisions or Legal Developments The most significant legal development in Japan in the last three years relating to M&A is the development of the juris-prudence concerning transactions which involve conflicts of interest of a director or controlling shareholder. Notwith-standing a number of appraisal proceedings in which the court has addressed conflicts of interest issues in determin-ing the fair value of the shares of companies subject to ac-quisition or disposition transactions, the recent case of Rex Holdings (“Rex”), for the first time in Japan, considered the duty of directors in a management buyout.

The directors of Rex, together with a private equity fund, acquired 100% of Rex’s shares through a tender offer and a subsequent cash squeeze-out of the remaining sharehold-ers, each conducted at JPY230,000 per share. Dissenting shareholders who were subject to the squeeze-out filed an appraisal suit.

Although the Tokyo District Court ruled in favour of Rex, the Tokyo High Court held that the fair value of the shares in the squeeze-out should be JPY336,696 per share. After this decision was upheld by the Supreme Court, sharehold-ers who did not participate in the appraisal suit filed a law-suit against Rex’s directors and statutory auditors, claiming a breach of their duties of care, and demanded an amount equivalent to the difference between the tender offer price (or squeeze-out price) (ie JPY230,000) and the fair price de-termined by the Tokyo High Court in the appraisal suit (ie JPY336,696). One primary issue in the Rex case was whether the release of an amendment to the earnings forecast of the company that was released a few months prior to the launch of the tender offer and that adjusted such earnings forecast downward was aimed at manipulating the market price of the company to lower the tender offer price.



7

After the Tokyo District Court dismissed the claim and found that the directors did not breach their duty, on ap-peal, the Tokyo High Court held that the directors’ duty of care must be exercised for the common interests of the shareholders and established for the first time in Japan that the directors in a management buyout owe (i) a duty to en-sure that the fair corporate value is transferred among the shareholders and (ii) a duty to disclose adequate information to ensure informed decision-making by the shareholders.

While the Tokyo High Court held in the Rex case that there was no breach of the duty to transfer the fair corporate value among the shareholders because a third party valuation re-port obtained by Rex indicated that the tender offer price had a sufficient premium over a price valuation calculated by several methods, the court found that the directors breached their duty to disclose adequate information because the di-rectors did not disclose the fact that a management buyout was in preparation when the company issued the press re-lease announcing the downward adjustment of the earnings forecast. The court did not grant monetary damages to the plaintiff shareholders, however, because it held that even if that fact had been disclosed, if the tender offer failed (such that the shareholders would continue to hold the shares of Rex as a listed company), the shareholders would not have been able to obtain in the market an amount higher than the tender offer price because Rex’s financial results at the time of the tender offer were deteriorating.

As described above, the court in the Rex case only addressed the directors’ duties in the context of a management buyout, but the impact of the decision may extend to other transac-tions involving conflicts of interest and may be a milestone in the development of jurisprudence regarding directors’ duties in M&A transactions in general. In fact, another low court has referred to this Rex case decision in its holding (though in the context of a management buyout).

3.2 Significant changes to takeover Law The FIEA, the primary regulation that governs takeovers of public companies, has not been changed in any significant way since 2014. However, amendments to the Companies Act of Japan that came into full effect in May 2015 have had some impact on takeovers of public companies. The amend-ments to the Companies Act include, among other things, the introduction of an express squeeze-out right.

As described in 6.8 Squeeze-Out Mechanisms , due to pos-sible taxation on the assets of the target company, and prior to the aforementioned amendments to the Companies Act, a cash-out merger had been rarely used in Japan and a more complex “wholly callable share scheme” was more common for minority squeeze-out transactions.

Under the amended Companies Act, a “special controlling shareholder” of a company (ie a shareholder holding 90% of the voting rights of a company) has the right to force the other shareholders in the company to sell their shares to the special controlling shareholder (“Squeeze-out Right”). To exercise the Squeeze-out Right, the special controlling shareholder must first notify the board of the target com-pany of certain particulars of the squeeze-out, including the amount of consideration, and obtain the target company’s approval to proceed. When the board approves the squeeze-out, the target company must then notify its shareholders of the particulars of the squeeze-out or make a public notice on or before the 20th day prior to the date of acquisition of shares pursuant to the squeeze-out.

The Squeeze-out Right is mainly used following a tender offer, although it could theoretically also be used in oth-er situations. If the acquirer is unable to achieve the 90% threshold in a tender offer, the acquirer may still implement a wholly callable scheme or other scheme that would require two-thirds of the voting rights. Whether or not a top-up op-tion may be utilised under Japanese law to achieve the 90% threshold is still under further discussion by the practition-ers and scholars.

The amendments to the Companies Act allow the special controlling shareholder to acquire stock options and con-vertible bonds as well as shares, which is not possible under the wholly callable share scheme.

Upon the exercise of the Squeeze-out Right, dissenting shareholders will have a right to exercise appraisal rights. In addition, if the exercise of the right would violate law or the company’s articles of incorporation or the consideration is grossly improper, the dissenting shareholders will have a right to seek an injunction.

The amendments to the Companies Act include some other changes that impact M&A transactions, including:

•the addition of a right of shareholders holding at least 10% of voting rights to request a shareholders’ meeting if a pro-posed issuance of new shares to a third party would result in a change of control;

•a new requirement for a special resolution of shareholders to authorise a disposition of shares in any material sub-sidiary (ie if the book value of the shares in the subsidiary represents at least 20% of the company’s assets) that results in a change of control of the subsidiary;

•imposition of successor liability in the case of a fraudulent spin-off or business transfer;

•streamlining of regulations on stock combinations that can be used for a cash squeeze-out; and

•addition of injunctive relief in limited situations.


8

4. Stakebuilding

4.1 Principal Stakebuilding StrategiesA bidder who is not willing to wage a hostile takeover usu-ally avoids building a stake as a “toehold” before launching an offer in Japan. In Japan, the building of a toehold with-out notice to target management is viewed as having the potential to negatively affect management’s willingness to accept an acquisition offer, and the resistance of manage-ment to a takeover may significantly lower the chance of a successful takeover, since few hostile takeover attempts have succeeded in Japanese M&A history. Furthermore, there is an experimental study indicating that a bidder’s ownership ratio in a target company prior to launching an offer did not lower the subsequent tender offer premiums paid by the bidder in Japan. Should a bidder decide to build a toehold, it would purchase the shares on the market or through a private transaction with one or a limited number of principal shareholders.

4.2 Material Shareholding Disclosure ThresholdsA shareholder is required under the FIEA to file a large-scale shareholding report with the relevant local finance bureau within five business days after its shareholding ratio in a list-ed company exceeds 5%. When calculating the shareholding ratio, the shares held by a joint holder are aggregated. A joint holder includes (i) certain affiliates and (ii) another share-holder with whom the shareholder has agreed on jointly ac-quiring or transferring shares in the target company, or on jointly exercising the voting rights or other rights as a share-holder of the target company. After filing the report, if the shareholding ratio increases or decreases by 1% or more, an amendment to the report must be filed within five business days from that increase or decrease. Financial institutions that trade securities regularly as part of their business and satisfy certain requirements under the FIEA are required to file the report only twice a month.

In a large-scale shareholding report, a shareholder must disclose:

•information about the shareholder’s identity; •the purpose of the shareholding; •any intention to make a proposal that would materially

affect the issuer’s business (including a proposal of an ac-quisition or disposition of material assets, a large amount of borrowings, an appointment or dismissal of a representa-tive director, a material change of board composition, or a merger, company split or any other business combination);

•the number and ratio of the shares; •acquisitions and dispositions of the issuer’s shares con-

ducted during the last 60 days; •certain material terms of any material agreement regarding

the shares held by it; and •funds used to acquire such shares.

4.3 Hurdles to StakebuildingAs further described in 9.3 common Defensive Measures , some Japanese listed companies have adopted, in most cases by a resolution of a shareholders’ meeting, takeover defence measures that prevent an acquirer from acquiring shares in the company in excess of a certain threshold. The threshold is generally set between 15% and 30% (20% in most cases). Also, as further described in 6.2 Mandatory Offer Thresh-olds , an acquisition of shares of a listed company may be subject to the tender offer rules under the FIEA, which pro-hibits a bidder from acquiring more than one-third of the voting rights of the target company through off-market trad-ing or off-floor trading.

4.4 Dealings in Derivatives Dealings in derivatives are allowed in Japan. A bidder may purchase derivatives regarding shares in a target company to build an economic stake in that target company or hedge risks regarding its shares in the target company.

4.5 Filing/reporting Obligations Equity derivatives may be subject to the large-scale share-holding reporting obligations. Options pertaining to shares may trigger disclosure if, upon exercise, they would result in excess of a 5% shareholding. However, holding equity de-rivatives which are cash-settled and do not transfer the right to acquire shares would not be likely to trigger disclosure. According to the relevant guidelines issued by the FSA, de-rivatives that transfer only economic profit/loss in relation to target shares, such as total return swaps, are generally not subject to disclosure. However, even holding such cash-settled equity derivatives may trigger disclosure, if a holder purchases long positions on the assumption that a dealer will acquire and hold matched shares to hedge its exposure (instead of cash settlement).

5. Negotiation Phase5.1 requirement to Disclose a Deal If the target company is a listed company, it must disclose the deal when the board approves the contemplated transaction. Typically, this approval is given on the day that a definitive agreement is to be signed by the target company, and the disclosure is made on the same day.

In general, there is no legal requirement to disclose the deal when the target company is first approached or when nego-tiations commence. If a non-binding letter of intent is signed by the target company, the deal is sometimes (but not very commonly) disclosed. In those cases where disclosure is made at an early stage, the purpose is often to allow the par-ties to discuss the deal openly with a wider group of relevant organisations or personnel. For example, if the transaction might require the competition authorities to conduct third party hearings, the parties may prefer to disclose the trans-



9

action sooner rather than later and to discuss the possibility of the transaction with the authorities in order to expedite the authorities’ review. There may also be cases where a large transaction might require the parties to involve a broader range of their employees for the due diligence, and therefore the parties may elect to disclose the transaction at an early stage to avoid a failure to maintain the secrecy of the transac-tion during the due diligence process.

5.2 Market Practice on timing Recently, significant attention has been paid to the manner in which the target company should handle a leak of infor-mation in the market. Where there is a leak of information concerning a listed company that would have a material im-pact on investors’ decisions, the TSE will make inquiries of the listed company and, if necessary, may require it to make timely and appropriate disclosure of the matter. In May 2014, the TSE introduced a new rule whereby the TSE may provide an alert to investors if it considers it necessary to do so when leaked information is unclear or otherwise requires the at-tention of investors to gain information of the relevant listed company or its shares.

5.3 Scope of Due DiligenceIn a negotiated transaction, due diligence generally includes a comprehensive review of the target company’s business, legal, financial/accounting and tax matters. The scope of due diligence may vary, depending on the size and nature of the deal or any time constraints in the parties’ negotiations, and may be focused on material issues by setting a reasonable materiality threshold.

Depending on the level of antitrust issues involved, the par-ties may be restricted from exchanging certain competitively sensitive information during the due diligence so as to avoid so-called “gun-jumping” issues under the Antimonopoly Act. In short, the parties must operate as separate and inde-pendent entities until the applicable waiting period under the Antimonopoly Act has expired, and therefore the parties must not engage in conduct that could facilitate unlawful co-ordination during that period. In such cases, employees who may be in a position to use confidential information for purposes other than due diligence, such as anyone with responsibilities regarding sales or marketing of the parties’ competing products, generally should not have access to such information.

5.4 Standstills or exclusivityIn a friendly transaction, a standstill provision (which gener-ally prohibits the potential acquirer from acquiring the target company’s shares outside a negotiated transaction) is not very common in Japan. However, even if there is no standstill provision, as described in 4 Stakebuilding in practice those bidders acquiring the shares of the target company without the target company’s prior consent have traditionally been

viewed by Japanese listed companies as being unfriendly bidders. Therefore, any acquisition of shares in advance of a negotiated transaction might jeopardise the friendly nature of the transaction.

If the target company is a listed company, it is not always the case that the target company will grant exclusivity (eg a com-mitment by the target company not to negotiate a similar deal with any other third party for a certain length of time) to a particular bidder. However, for example, a financially distressed target company may offer exclusivity to a poten-tial sponsor with the aim of soliciting the sponsor to con-sider and negotiate the deal. Exclusivity may also be agreed upon to bind both the acquirer and the target company in the context of a business integration (such as a merger) of the two parties.

5.5 Definitive agreementsIt is permissible but not very common for an acquirer and the target company to document a tender offer (commonly followed by a second-step cash squeeze-out of the remaining minority shareholders who did not participate in the tender offer if an acquirer intends to acquire 100% of the shares of the target) in a definitive transaction agreement. Procedur-ally, the target company will be required to disclose its opin-ion with regard to the contemplated tender offer, including the grounds and reasons for the opinion, the second-step process in a two-step acquisition structure and any policy or plans after the tender offer. Therefore, typically the target company does not take any actions that would be inconsist-ent with the process outlined in its own disclosure, even if there is no such documentation between the acquirer and the target company. In addition, it is likely that a target com-pany would not want to enter into an agreement that would bind the target company’s board to support the transaction regardless of any future competitive offers from third parties, unless at a minimum it includes a fiduciary out provision that would allow the target’s directors to avoid a breach of their duties of care and loyalty.

It is more common, however, immediately prior to the launch of the tender offer, for a buyer and principal shareholder of the target company to enter into an agreement where the shareholder agrees to tender its shares in the contemplated tender offer. See 6.9 irrevocable commitments.

6. Structuring6.1 Length of Process for acquisition/SaleThe length of the process for acquiring or selling a business can vary, depending on a number of factors, including the size and type of assets being acquired or sold, the type of the target company (whether public or private), the level of due diligence required and the length of time needed to obtain required regulatory approvals.


10

An auction will normally be structured as a two-phase pro-cess. In phase one, the seller will usually require the potential buyers to submit a non-binding indication of interest, which typically will address, among other things, the indicative of-fer price, proposed deal structure, possible conditions that the buyer may seek, and necessary regulatory approvals. In phase two, a few selected buyers will be given access to the data room for due diligence and will be required to submit their final bid, together with a mark-up of the draft transac-tion agreement circulated by the seller. After final bids are submitted, the seller will seek to negotiate and finalise the transaction agreement quickly so that the signing can occur as soon as practically possible. After the signing, the parties will seek any applicable regulatory approvals or clearances for the transaction, such as antitrust clearance and any re-quired prior notification under the FEFTA (see 2 Overview of the regulatory Field).

In an acquisition involving a tender offer, the tender offer period must be set between 20 and 60 business days. If the acquisition is effected through a two-step process where the tender offer is followed by a second-step squeeze-out of the remaining minority shareholders who did not participate in the tender offer, the process of the second step will de-pend on the level of shareholding that the acquirer owns after the first-step tender offer. If the acquirer owns 90% of the voting rights of the target company, the acquirer can complete the second step rather quickly (typically around one month) by exercising the Squeeze-out Right (see 6.8 Squeeze-Out Mechanisms). In cases where the acquirer is unable to achieve the 90% threshold in the first-step tender offer, the second step will usually take a few months, because in those cases the second step will require Squeeze-Oiute the target company to convene a shareholders’ meeting and to complete the court permission procedures (see 6.8 Squeeze-Out Mechanisms).

6.2 Mandatory Offer ThresholdWith respect to a listed company (and some other types of companies), the FIEA provides specific requirements for a mandatory tender offer. Overall, the primary threshold for a mandatory tender offer is one-third of the voting rights of the target company (the “One-Third Rule”). Therefore, sub-ject to certain limited exceptions, an acquirer must conduct a tender offer if the “total shareholding ratio” (kabukentou shoyu wariai) of the acquirer exceeds one-third after the pur-chase and the purchase is made in off-market trading or off-floor trading (ie trade-sale-type market trading). This means that an acquirer cannot obtain, for instance, a 40% stake of voting shares from the principal shareholder of a listed company through a private buy/sell transaction. The “total shareholding ratio” is defined in detail in the FIEA and the calculation generally includes the aggregate voting rights of the target company held by the acquirer and certain special

affiliated parties (tokubetsu kankeisha) of the acquirer (on an as exercised and as converted to common stock basis).

The one-third threshold for this purpose derives in part from the requirement under the Companies Act for a special resolution of the shareholders for certain important actions (eg merger, amendment to the articles, dissolution), which requires approval by two-thirds of the voting rights present at the relevant shareholders’ meeting. Therefore, ownership of one-third of the voting rights will effectively grant the shareholder a veto right over any special resolution of the shareholders at a shareholders’ meeting.

In addition to the One-Third Rule above, a few other situa-tions where a mandatory tender offer is required are gener-ally summarised as follows:

•5% Rule – if the total shareholding ratio of the acquirer exceeds 5% as a result of an off-market purchase. An ex-ception applies to the 5% Rule if the acquirer has not pur-chased shares in off-market trading from more than ten sellers in aggregate during the 60 days before the day of the purchase on which the threshold is crossed (ie during a 61-day period including the date of the threshold-crossing purchase).

•Rapid Buy-Up Rule – if the total shareholding ratio of the acquirer exceeds one-third as a result of the acquisition of shares within a three-month period, whereby: (i) the ac-quirer accumulates more than a 10% shareholding through on-market trading, off-market trading and subscription of newly issued shares from the company; and (ii) that ac-cumulation includes an accumulation of more than 5% through off-market and off-floor trading (ie trade-sale-type market trading). The Rapid Buy-Up Rule was introduced in 2006 with the primary aim of capturing a combination of on-market and off-market trading or a combination of off-market trading and new share issuances, which in each case would result in an acquirer holding more than a one-third total shareholding ratio. This effectively means that, for example, if an acquirer obtains 30% of the voting shares through off-market trading, it cannot then purchase addi-tional shares during the next three-month period at mar-ket, off market (including a tender offer) or otherwise that would result in its shareholding ratio exceeding one-third.

•Counter Tender Offer Rule – if, during the period in which there is an ongoing tender offer by a third party, an acquirer with an existing shareholding ratio of more than one-third purchases more than a 5% additional shareholding. The Counter Tender Offer Rule effectively captures on-market trading, because off-market trading resulting in a total shareholding ratio exceeding one-third will be subject to the One-Third Rule in any event.



11

6.3 considerationWhile cash is more commonly used as consideration in ac-quisitions, the type of consideration varies depending on the nature and structure of the acquisition.

In a share purchase or business transfer, the consideration is predominantly cash-only. An exchange offer through which the acquirer offers its own securities as consideration in a tender offer is legally permitted and there is special legisla-tion specifically relaxing the rules related to such exchange offers under certain circumstances where the transaction is pre-approved by the relevant government ministries. How-ever, the use of an exchange offer has not developed in prac-tice in Japan, due to unresolved taxation issues applicable to the selling shareholders (the taxation is not deferred in the case of an exchange offer).

In a statutory business combination, such as a merger, share exchange or company split, stock is more commonly used as consideration, although cash or another consideration is legally permitted and it is often seen in the case of a com-pany split.

A mix of cash and stock is not common in Japan. However, a cash tender offer followed by a second-step stock-for-stock merger or share exchange is often seen and this structure effectively provides the shareholders with the choice of cash or stock.

6.4 common conditions for a takeover OfferThe FIEA strictly regulates tender offer conditions and per-mits the withdrawal of a tender offer only upon the occur-rence of certain narrowly defined events. Those withdrawal events must also be specifically provided in the tender offer registration statement. The withdrawal events include:

•a decision by the target company to make a material change, such as a merger, reduction of capital stock split and issuance of new shares;

•the occurrence of a material event with respect to the target company, such as damage due to a natural disaster;

•the failure to obtain regulatory approvals; and •the occurrence of a material event with respect to the ac-

quirer, such as dissolution and bankruptcy.

A financing condition is not permitted and the acquirer must prepare as part of the tender offer registration state-ment a document evidencing prearranged financing on a firmly committed basis. If the prearranged financing is sub-ject to conditions, the substance of these conditions is gener-ally required to be described in the statement.

In a statutory business combination, there are no specific limitations on conditions. However, in practice, the condi-tions in a business combination among listed companies are

typically quite limited, such as necessary shareholder ap-proval and regulatory approvals and clearances. A financing condition is not commonly used in a business combination because, as explained in 6.3, stock is more commonly used as the consideration for a business combination.

6.5 Minimum acceptance conditionsA minimum acceptance condition is permitted for a tender offer. Where a minimum acceptance condition is specified in the tender offer registration statement, the acquirer will not purchase any shares if the number of shares tendered is lower than that specified minimum number. If a minimum acceptance condition is set at the commencement of the ten-der offer, that minimum threshold may not be increased by the acquirer, but the acquirer may decrease or remove the condition.

In a 100% acquisition deal, the minimum acceptance condi-tion is typically set such that the voting rights held by the acquirer after the tender offer will reach two-thirds of the target company’s voting rights on a fully diluted basis. The ownership of two-thirds of the voting rights of the target company will ensure that the acquirer will be able to pass a special resolution of the shareholders at a shareholders’ meeting (eg merger, amendment to the articles, dissolu-tion). The acquirer will then proceed to the second step of the acquisition to squeeze out any remaining shareholders who did not tender their shares in the tender offer (see 6.8 Squeeze-Out Mechanisms).

If an acquirer does not seek 100% ownership of the target company, the minimum acceptance condition is typically set such that the voting rights held by the acquirer after the tender offer will be a majority of the voting rights of the target company on a fully diluted basis. The majority owner-ship will allow the acquirer to pass an ordinary resolution of the shareholders at a shareholders’ meeting (eg election of directors, dividend). The primary purpose of a deal of this type is typically to allow the shares of the target company to continue to be listed on a stock exchange.

In addition, the acquirer may also set a maximum number of shares to be purchased by the acquirer, provided that the total shareholding ratio of the acquirer after the tender of-fer will remain less than two-thirds (which means that the acquirer cannot set that maximum at a level of two-thirds or higher). If the number of shares tendered exceeds that maximum number, the acquirer must purchase the tendered shares on a pro rata basis. If, for instance, a bidder sets both a minimum and maximum at the level of a simple majority, a majority acquisition can be achieved without purchasing all shares tendered.


12

6.6 additional Governance rights If an acquirer does not seek 100% ownership of the target company, the acquirer may seek certain contractual protec-tions, such as a right to designate members of the company’s board of directors, veto rights over certain material matters, and information rights to receive periodic financial informa-tion and business reports. However, if the target company is a listed company, such protections may be quite limited because the target company will not be likely to accept such protections of the acquirer from a corporate governance standpoint.

6.7 Voting by Proxy In certain circumstances, shareholders can vote by proxy. See 6.8 Squeeze-Out Mechanisms.

6.8 Squeeze-Out MechanismsIn a tender offer for 100% of a listed company, the remaining shareholders who did not tender their shares in a successful tender offer will generally be squeezed out through a second-step squeeze-out mechanism.

In practice, if the acquirer owns 90% of the voting rights of the target company after the first-step tender offer (thereby becoming a “special controlling shareholder”), the acquirer will usually complete the second step by exercising a statu-tory right to force the other shareholders to sell their shares to the special controlling shareholder (the “Squeeze-out Right”), which is a newly introduced mechanism under the amended Companies Act. To exercise the Squeeze-out Right, the special controlling shareholder must first notify the board of the target company of certain particulars regard-ing the squeeze-out, including the amount of consideration, and obtain the target company’s approval to proceed. When the board approves the squeeze-out, the target company must then notify its shareholders of the particulars of the squeeze-out or make a public notice on or before the 20th day prior to the acquisition date. Upon the exercise of the Squeeze-out Right, dissenting shareholders will have a right to exercise appraisal rights. In addition, if the exercise of that right would violate law or the company’s articles of incor-poration or the consideration is grossly improper, the dis-senting shareholders will have a right to seek an injunction. Whether or not a top-up option often used in the USA may be utilised under Japanese law to achieve the 90% threshold is still under further discussion.

In cases where the acquirer is unable to achieve the 90% threshold in the first-step tender offer, it may still implement the second-step squeeze-out through other means, such as the so-called “share cancellation scheme” or the previously often used “wholly callable share scheme”, in each case to the extent that the acquirer holds two-thirds of the voting rights of the target company (ie the threshold to pass a special reso-lution at the target company’s shareholders’ meeting). Each

of these alternative schemes normally takes a few months, as the process requires the target company to convene a share-holders’ meeting and to complete certain court permission procedures (as described below). In the shareholders’ meet-ing, the acquirer can vote by proxy. A straightforward cash-out merger or other statutory business combination is legally permitted under the Companies Act, but is generally not used because it would not be “tax qualified”, meaning that the target company would be required to revalue its assets at the then-current market value basis and recognise taxable gains from the transaction.

In the share cancellation scheme, the target company will implement a share cancellation in which the ratio of share cancellation is set so that the shares held by each minority shareholder will become less than one full share of the target company. As the amended Companies Act introduced cer-tain protection mechanisms for the minority shareholders, such as the appraisal right and the right to seek injunction under certain circumstances, the share cancellation scheme is now considered a viable option whereby to implement the second-step squeeze-out. In the wholly callable share scheme, the target company technically recharacterises its common stock as a type of redeemable share (so-called “shares wholly subject to call” (zembushutoku joukou tsuki shurui kabushiki)) that can be called/redeemed by the tar-get company in exchange for a new class of shares. Similar to the share cancellation scheme, the exchange ratio under the wholly callable share scheme is set so that each minor-ity shareholder receives less than one full share of this new class of shares.

In completing the share cancellation scheme or the wholly callable share scheme, there is a procedure under Japanese law whereby the fractional interests that would be allocated to the minority shareholders will instead be sold by the tar-get with court permission, with the minority shareholders receiving cash, usually in an amount substantially equivalent to the offer price used in the first-step tender offer.

The wholly callable share scheme used to be a primary op-tion for the second-step squeeze-out but is less likely to be used after the 2015 amendment to the Companies Act. It looks as if the “share cancellation scheme” will now be com-monly used in cases where the acquirer does not own 90% of the voting rights of the target company.

6.9 irrevocable commitments If there is a principal shareholder of the target company, it is relatively common for the acquirer to obtain an irrevocable commitment from the principal shareholder to tender its shares in the target company in the contemplated tender of-fer. The commitment will be made in a written agreement (oubo keiyaku) which is negotiated prior to the announce-ment of the transaction by the parties. Where such a com-



13

mitment exists, material terms of the commitment are dis-closed in the tender offer registration statement.

The commitment may be negotiated to include a certain level of representations and warranties by the principal share-holder in relation to the business of the target company. It is also possible for the parties to negotiate a clause where the principal shareholder will be required to revoke its tender upon the occurrence of certain events (eg material breach of representations and warranties by the principal shareholder or failure of the target company’s board to recommend the contemplated transaction to the shareholders). However, by a combination of this clause and the minimum acceptance condition (that would not be satisfied but for the tender by the principal shareholder), the acquirer could essentially withdraw the tender offer in circumstances that would not constitute permissible withdrawal events under the FIEA. The regulator (FSA) has interpreted this type of clause as being subject to the strict tender offer withdrawal restric-tions under the FIEA (as explained above). For example, the agreement by a principal shareholder to revoke its tender on the failure of obtaining financing by a bidder would not be permitted because this falls outside the scope of the statuto-rily defined withdrawal events under the FIEA.

Whether this type of commitment agreement includes a clause that would permit the principal shareholder to re-fuse to tender in the event that a competing bid is made by a third party at an offer price higher than the tender offer price varies, depending on the type of principal shareholder (eg a founder, senior management, a private company, a listed company) and other factors. This is a matter of negotiation and may be incorporated in the commitment, particularly if the deal did not involve an auction process and the principal shareholder is interested only in the financial aspects of the transaction.

7. Disclosure7.1 Making a Bid PublicIf an acquisition is made by a tender offer to the shareholders of a listed company, a bidder must publicly announce the bid at the beginning of the tender offer by (i) a press release, (ii) public notice of the tender offer and (iii) a tender offer reg-istration statement. Items (ii) and (iii) are required pursuant to the FIEA and are to be made or filed on the tender offer commencement date. As the press release in item (i) is only required by the stock exchange regulations, if the bidder is not a listed company, the bidder is not required to issue a press release, although the target listed company is required to issue a press release immediately after it has formed an opinion (regarding its endorsement or not) on the tender offer. If the bidder’s press release is required, it is usually made one business day before the tender offer commence-ment date (simultaneously with the target company’s press

release unless the bid is unsolicited). However, in certain exceptional situations, a bid is publicly announced by the bidder and the target company in advance of the commence-ment of the tender offer, such as when earlier public disclo-sure would be required in order to obtain merger clearance in certain jurisdictions.

7.2 types of Disclosure When an acquisition is made by a statutory business combi-nation (eg merger, corporate split, share exchange or share transfer) whereby the acquirer’s shares are issued as consid-eration, the filing of a security registration statement by the acquirer is required if (i) there are at least 50 shareholders of the target company and the target company is a reporting company under the FIEA, and (ii) no security registration statement has already been filed in relation to the same class of shares as the shares to be issued upon such a statutory business combination. For example, if a foreign purchaser acquires a Japanese listed company by way of a triangular merger and issues the shares of the foreign purchaser as consideration of the merger, the foreign purchaser will be required to file a security registration statement unless it has already become a reporting company in Japan under the FIEA.

7.3 requirement for Financial StatementsFor a tender offer, the bidder must disclose in the tender of-fer registration statement its financial statements, prepared in accordance with Japanese GAAP for the latest fiscal year, together with any quarterly or half-year financial statement after the date of the most recent full-year financial state-ments. If the bidder is a foreign entity, it may provide finan-cial statements prepared in accordance with the GAAP of its home country, with explanatory notes as necessary, to explain certain differences with Japanese GAAP, in lieu of Japanese GAAP financial statements.

When a business combination requires the filing of a secu-rity registration statement, the offeror must disclose, in the security registration statement, its financial statements for the last two fiscal years, together with any quarterly updates, prepared in accordance with Japanese GAAP. However, a foreign offeror may produce financial statements prepared in accordance with the accounting standards of its home country or any other country in each case with the specific approval from the Minister for Financial Services of Japan.

7.4 Disclosure of the transaction DocumentsDisclosure of transaction documents in full is not required for a tender offer. If there are any agreements between the bidder and the target company or its officers in relation to the tender offer itself or a disposal of material assets after the tender offer, the material terms of such agreements must be described in the tender offer registration statement.


14

For a business combination, the Companies Act requires the parties to the business combination to prepare an agree-ment providing for statutorily required matters. A statuto-rily required agreement such as a merger agreement, share exchange agreement or company split agreement must be disclosed in full. However, in practice, such an agreement only addresses the matters required by law and is thus very short. In many cases, the parties to a business combination enter into another agreement to provide in detail the terms of the business combination, in which case, only the material terms of such an agreement need be disclosed in the security registration statement (if the filing of the security registra-tion statement is required as previously discussed) and the press release pursuant to the stock exchange regulations (if the party is a listed company).

8. Duties of Directors8.1 Principal Directors’ Duties Under the Companies Act, as a general principle, directors owe a duty of care as a good manager, and a duty of loyalty to the company and, indirectly, to the shareholders of the com-pany. However, as illustrated in some recent cases (including the Rex case described in 3.1 Significant Court Decisions or Legal Developments), the prevailing view is that the direc-tors owe a duty to give due regard to the common interests of shareholders. Nonetheless, this duty would not extend to all stakeholders, such as creditors or employees of the company.

Except for violations of law or situations involving a con-flict of interest, the business judgement rule generally ap-plies in determining whether directors have breached their duties. Under the business judgement rule in Japan, direc-tors are not held accountable for their decision unless (i) the directors were careless and failed to recognise relevant facts in making their decision or (ii) either the process of the decision-making or the substance of the decision was particularly unreasonable or inappropriate. There have not been many judicial precedents addressing directors’ duties in M&A transactions, although it is generally understood by M&A practitioners that the business judgement rule gener-ally applies to directors in M&A transactions. However, as can be seen from the Rex case, for transactions involving conflicts of interest, the courts are not likely to apply the business judgement rule and the courts have reviewed the directors’ actions in such transactions with a heightened level of judicial scrutiny in recent years.

8.2 Special or ad Hoc committees Use of an ad hoc special committee in M&A transactions involving conflicts of interest is becoming common in Ja-pan. In almost all cases of management buyouts in recent years, boards of directors have established an ad hoc special committee to review the management buyout. However, the composition and the authority of these committees vary, de-

pending on each case, and differ substantially from special committees as used in the USA. In most cases, the special committees established in Japan were composed of outside corporate auditors (shagai kansayaku) and/or independent experts such as lawyers, certified public accountants and in-vestment bankers or other business professionals. Only a few special committees included outside directors as members, although this trend may change as many listed companies are now appointing more outside directors in response to changes to the Corporate Governance Code. Also, less than half of these special committees were granted the authority to negotiate the terms of the transaction with the acquirer, and it was rare for a special committee to retain its own legal and financial adviser. In most cases, the special committees referred to the valuation report that was prepared by the financial adviser to the target company.

8.3 Business Judgement ruleOther than management buyouts, it is still not very common in Japan to establish an ad hoc special committee in an M&A transaction, even if the transaction involves conflicts of in-terest such as a merger between a controlling shareholder and its subsidiary. If the subsidiary is a listed company, the stock exchange regulations require the listed subsidiary com-pany to obtain an opinion from an independent third party to confirm that the proposed business combination with a controlling shareholder would not be disadvantageous to the subsidiary company’s minority shareholders. Such an inde-pendent opinion is usually provided by an outside corporate auditor or a lawyer, not by a special committee.

8.4 independent Outside advice It is common for directors of a company in an M&A trans-action to obtain financial, tax and legal advice from outside experts. Obtaining a valuation report from an independent outside financial adviser is recognised as a prerequisite to ensure fairness and transparency. In practice, a valuation report is obtained by the target company in almost all tender offers and by both parties in many statutory business com-binations such as mergers. In some cases, in addition to the valuation report, directors obtain a fairness opinion from an outside financial adviser, but this is not a prerequisite.

9. Defensive Measures9.1 Hostile tender Offers Hostile tender offers are permitted but are not common in Japan. Historically, there have been many cross-share-holdings between Japanese companies which were never unwound, even when the share price significantly declined or an acquirer offered to buy the shares at a much higher price than market price. In particular, Japanese banks, in-surance companies and other financial institutions held the shares of many listed companies and played a role as “stable” shareholders. Although the level of such cross-shareholdings



15

has decreased for various reasons, there still remain cross-shareholdings at a lower rate. Many such “stable” sharehold-ers tend to be reluctant to tender their shares in a target company in a hostile tender offer, considering their busi-ness relationship with the target company. Hence, few hostile tender offers have been successfully consummated thus far.

9.2 Directors’ Use of Defensive MeasuresThere is no case law in Japan clearly setting out the param-eters of legally permissible defensive measures or the direc-tors’ duties in adopting such measures. However, there have been several cases that indicate the factors to be considered in determining the legality of defensive measures.

Defensive measures to ensure necessary time and infor-mation for shareholders to consider an offerThe Tokyo District Court held in 2005 that directors may take reasonable defensive measures to ensure necessary in-formation and a reasonable period for shareholders to con-sider whether the shareholders should entrust the manage-ment of the company to incumbent directors or an acquirer.

Defensive measures to hold off a takeover attempt because it is substantively inappropriateThe Tokyo High Court held in 2005 in the Livedoor v Nip-pon Broadcasting case that, where there is a contest for ob-taining control of a company, defensive measures are gen-erally not allowed for the primary purpose of lowering the acquirer’s shareholding ratio and maintaining or ensuring incumbent management’s control of the company. However, if there are exceptional circumstances where the defensive measures are justified in the context of protecting the inter-ests of shareholders as a whole, defensive measures may be allowed as long as they are necessary and reasonable.

In Japan, directors often propose the implementation of defensive measures at a shareholders’ meeting, rather than making their own final decision on these matters. With re-gard to defensive measures approved by shareholders, the Supreme Court in 2007 held in the Steel Partners Japan Stra-tegic Fund v Bull-Dog Sauce case that it was permissible under the equitable doctrine for a company to allot stock options to all shareholders that are only exercisable by, or callable for new shares by the company with respect to, those shareholders other than the hostile acquirer, as long as such allotment is necessary and reasonable to protect the com-mon interests of shareholders from the probable damages to be caused by the bidder.

9.3 common Defensive MeasuresMost common hostile takeover defensive measures adopted by Japanese listed companies before a hostile acquirer actu-ally emerges belong to the so-called “pre-warning” type of defensive measure. The company sets and publicly discloses (warns) a procedure with which a would-be acquirer has to

comply before starting an acquisition. No stock or stock op-tion is issued to the shareholders at the time of adoption of this type of defensive measure. Under the procedure, the ac-quirer has to provide the board of directors with information regarding the acquirer and its acquisition plan, and ensure necessary time for directors to consider the plan and prepare alternatives and for shareholders to consider which plan is better for shareholders’ interest. A committee composed of members who are independent from the management of the company is usually established, and the committee makes a recommendation as to the company’s response to the pro-posed acquisition. If the company determines that the bidder has not complied with the procedures set by the company or that the proposed acquisition would cause clear harm to the corporate value and common interests of shareholders, it would allot stock options to all shareholders without contri-bution that are only exercisable by, or callable for new shares by the company with respect to, those shareholders other than the acquirer, resulting in a dilution of the shareholding ratio of the acquirer.

In most case, it is provided that the board of directors may also confirm shareholders’ intentions concerning an allot-ment of such options by convening a shareholders’ meet-ing. As of the end of July 2015, 480 listed companies have adopted these types of measures (13.4% of the total listed companies in Japan).

9.4 Directors’ DutiesAs discussed in 8 Duties of Directors directors have a duty of care as a good manager and a duty of loyalty to the compa-ny, and the business judgement rule is generally available for directors’ decisions in Japan. Laws and court precedents do not clearly provide that an intermediate or heightened level of review (like the Unocal standards – enhanced scrutiny) apply to directors’ decisions where they implement defen-sive measures. The Tokyo High Court held in the Livedoor v Nippon Broadcasting case, however, that defensive measures implemented by incumbent directors are not allowed unless they are justified in the light of the protection of the interests of shareholders as a whole.

9.5 Directors’ ability to “Just Say No”Directors cannot “just say no” against a hostile takeover at-tempt.

10. Litigation10.1 Frequency of LitigationIn general, it is not very common in Japan for shareholders or other stakeholders in a company to bring litigation against the company or its directors in connection with M&A trans-actions. Under Japanese law, it is not easy for stakeholders to enjoin in advance the consummation of any type of M&A transaction because the grounds for an injunction generally


16

are limited to a violation of law or the company’s articles of incorporation. The general view is that a violation by direc-tors of their duties of care and loyalty is not deemed a “vio-lation of law”. The exception is that shareholders may seek injunctive relief against (i) the issuance of stock or stock op-tions by the company pursuant to the Companies Act based on certain grounds, including that the issuance is unjust, and (ii) a short-form merger or exercise of the Squeeze-out Right (under the amended Companies Act) based on the grounds that the consideration is grossly improper.

10.2 Stage of DealShareholders are more likely to bring legal action in connec-tion with M&A transactions involving conflicts of interest, such as management buyouts or squeeze-out transactions conducted by a controlling shareholder, after the transac-tions are completed. The most common litigation in Japan is litigation with respect to appraisal rights of shareholders. Moreover, shareholders sometimes file a suit against direc-tors or corporate auditors of the target company for recovery of monetary damages suffered as a result of the violation of their duties of care and loyalty.

11. activism11.1 Shareholder activism The environment surrounding shareholder activism in Ja-pan has been changing over the last few years. For example, Japan’s Stewardship Code was issued on 26 February 2014 by a council of experts established by the FSA. The Steward-ship Code provides that institutional investors should fulfil their “stewardship responsibilities”, which are described as responsibilities to enhance the medium to long-term invest-ment return for their clients and beneficiaries by improving and fostering the investee companies’ corporate value and sustainable growth through constructive engagement or purposeful dialogue. Japan’s Corporate Governance Code was also issued on 1 June 2015 by the TSE. The Corporate

Governance Code provides that, as one of five general prin-ciples, listed companies should engage in constructive dia-logue with shareholders even outside the general sharehold-ers’ meeting. Additionally, the ownership ratio of shares in listed companies in Japan by foreign entities has increased for three consecutive years. These facts resulted in the growth of shareholder activism in Japan in 2015.

11.2 aims of activistsActivists usually focus on, among other things, demands:

•to use cash held by a company to pay dividends or repur-chase shares;

•to appoint outside or independent directors; •to remove takeover defence measures; •to spin off certain divisions of a company or other dives-

titures; and •to enter into M&A transactions (although there have been

few cases where an activist has publicly demanded or en-couraged specific M&A transactions).

In 2015, a domestic shareholder activist demanded that a target electronic company convene an extraordinary share-holders’ meeting to elect outside directors nominated by the shareholder activist, but that proposal was voted down. A large US-based hedge fund urged the target to increase shareholder returns, which prompted the target to pay a large amount of dividends and buy back its shares.

With respect to tender offers conducted as the first step of a squeeze-out transaction, activists occasionally advocate dur-ing the offer period, through a press release or other media, that the offer price is lower than fair value. However, it is not easy for activists to obtain injunctive relief from a court prior to the completion of the transaction; therefore, they usually seek ex-post relief, eg exercise of appraisal rights.

In relation to transactions requiring a shareholder resolu-tion, such as a merger, share exchange, company split or share transfer, activists rarely launch proxy fights against the announced transactions, although there are a few precedents where a transaction proposed at a shareholders’ meeting by management was not approved as a result of a proxy fight conducted by a shareholder activist (eg the proposed share exchange between Tokyo Kohtetsu and Osaka Steel did not win approval in 2007). As with squeeze-out transactions, shareholders often seek ex-post relief.

11.3 interference with completionActivists do not frequently seek or act directly and aggres-sively to interfere with the completion of announced trans-actions involving a public company in Japan.

Mori Hamada & MatsumotoMarunouchi Park Building 2-6-1 Marunouchi Chiyoda-ku Tokyo Tokyo-to Japan 100-8222

Tel: +81 3 5220 1800Fax: +81 3 5220 1700Email: [email protected]: www.mhmjapan.com/en