CHAMBERS Global Practice Guides JAPAN Corporate M&A LAW & PRACTICE: p.3 ContributedContributed by Mori Hamada by & Matsumoto MoriThe Hamada‘Law & Practice’ & Matsumoto 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 2017BUSINESS 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. JAPAN

LAW & PRACTICE: p.3 Contributed 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 JAPAN Contributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita

Law & Practice Contributed by Mori Hamada & Matsumoto

CONTENTS 1. Trends p.5 6.6 Additional Governance Rights p.12 1.1 M&A Market p.5 6.7 Voting by Proxy p.12 1.2 Key Trends p.5 6.8 Squeeze-Out Mechanisms p.12 1.3 Key Industries p.5 6.9 Irrevocable Commitments p.12 2. Overview of Regulatory Field p.5 7. Disclosure p.13 2.1 Acquiring a Company p.5 7.1 Making a Bid Public p.13 2.2 Primary Regulators p.5 7.2 Types of Disclosure p.13 2.3 Restrictions on Foreign Investment p.5 7.3 Requirement for Financial Statements p.13 2.4 Antitrust Regulations p.6 7.4 Disclosure of the Transaction Documents p.13 2.5 Labour Law Regulations p.6 8. Duties of Directors p.14 3. Recent Legal Developments p.6 8.1 Principal Directors’ Duties p.14 3.1 Significant Court Decisions or Legal 8.2 Special or Ad Hoc Committees p.14 Developments p.6 8.3 Business Judgement Rule p.14 3.2 Significant Changes to Law p.7 8.4 Independent Outside Advice p.14 4. Stakebuilding p.8 9. Defensive Measures p.14 4.1 Principal Stakebuilding Strategies p.8 9.1 Hostile Tender Offers p.14 4.2 Material Shareholding Disclosure Thresholds p.8 9.2 Directors’ Use of Defensive Measures p.15 4.3 Hurdles to Stakebuilding p.8 9.3 Common Defensive Measures p.15 4.4 Dealings in Derivatives p.8 9.4 Directors’ Duties p.15 4.5 Filing/Reporting Obligations p.8 9.5 Directors’ Ability to “Just Say No” p.15 5. Negotiation Phase p.8 10. Litigation p.15 5.1 Requirement to Disclose a Deal p.8 10.1 Frequency of Litigation p.15 5.2 Market Practice on Timing p.9 10.2 Stage of Deal p.16 5.3 Scope of Due Diligence p.9 11. Activism p.16 5.4 Standstills or Exclusivity p.9 11.1 Shareholder Activism p.16 5.5 Definitive Agreements p.9 11.2 Aims of Activists p.16 6. Structuring p.9 11.3 Interference with Completion p.16 6.1 Length of Process for Acquisition/Sale p.9 6.2 Mandatory Offer Threshold p.10 6.3 Consideration p.11 6.4 Common Conditions for a Takeover Offer p.11 6.5 Minimum Acceptance Conditions p.11

3 JAPAN Law & Practice Contributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita

Mori Hamada & Matsumoto’s corporate M&A team con- pany and and venture capital transactions, sists of approximately 40 partners and 80 associates. The friendly and hostile transactions, going-private transac- majority of the team is based at the main office in Tokyo, tions, MBOs, acquisition finance and takeover strategies. In although there are M&A team members at the domestic recent years, the firm has been particularly active in cross- branch offices in Osaka, Nagoya and Fukuoka, as well as border transactions between Japan and South and South- at the international branch offices in Singapore, Shanghai, East Asian countries. Beijing, Bangkok, Yangon and Jakarta. The firm has a full- The firm’s M&A lawyers often team up with lawyers with service M&A practice that handles mergers, acquisitions, expertise in other key practice areas in order to assist with restructurings and corporate alliances in a wide variety of M&A transactions involving distressed or insolvent compa- industries and sectors, including both domestic and cross- nies, as well as M&A-related litigation and arbitration. border transactions (inbound and outbound), listed com-

Authors Hajime Tanahashi is a partner in the firm Kenichi Sekiguchi is a partner and and has great expertise in corporate, practises in M&A, and general corporate M&A, private equity, venture finance and matters, including corporate litigations corporate governance. Tanahashi has also regarding M&A transactions. He focuses represented various domestic and interna- particularly on transactions involving tional private equity funds. He is the conflicts of interests such as management author of several publications, including ‘Private Equity in . He was admitted to the Bar in Japan in 2005 and Japan: Market and Regulatory Overview’ (co-authored), in New York in 2011. His contributions to legal publica- ‘Comprehensive Analysis of M&A Laws of Japan’ (co- tions include ‘Doing Business in Japan’ (co-authored), authored) and ‘Cross-Border M&A: Laws, Regulations and ‘Comprehensive Analysis of M&A Laws of Japan’ (co- Practical Considerations’. Tanahashi is a lecturer at Kyoto authored) and ‘Enterprise Law: Contracts, Markets, and University School (2007-), and is a director and member of Laws in the US and Japan’ (co-authored). the Industrial Innovation Committee, Innovation Network Corporation of Japan (2009-). He was admitted to the Bar Akira Matsushita is a partner and has in Japan in 1992 and in New York in 1997. expertise in cross-border/domestic M&A, corporate governance, takeover defence Takayuki Kihira is a partner and has and general corporate and securities law experience of M&A, corporate and matters. He has advised many listed securities laws. In particular, he has companies that have been subject to extensive experience in cross-border M&A shareholder activism and a hostile takeover, including a transactions and frequently represents . He was admitted to the Bar in Japan in 2006 international clients. He was admitted to and in New York in 2013. Matsushita has published the Bar in Japan in 2001 and in New York in 2007. He has ‘Comprehensive Analysis of M&A Laws of Japan’ (co- authored several publications, including ‘Comprehensive authored), ‘Reconsideration of Regulations for Proxy Analysis of M&A Laws of Japan’ (co-authored), ‘Cross- Solicitation (Volumes 1 and 2) - Based on Proxy Regula- Border M&A: Laws, Regulations and Practical Considera- tion in the US’ and ‘Shareholders’ Proposal and Proxy tions’ and ‘Corporations and Partnerships in Japan’. Fight’ (second edition).

4 Law & Practice JAPAN Contributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita

1. Trends vided in the FIEA (see a more detailed description of the “One-Third Rule” and other rules in6.2 Mandatory Offer 1.1 M&A Market Threshold). The M&A market in Japan continued to grow in 2015. The number of transactions increased by 6.3% from 2014, which A share acquisition may also be made by a “share exchange”, represents an increase for four consecutive years, and the one of the statutory business combinations, whereby an ac- value of transactions increased 68.3% from 2014. The reason quiring company can acquire 100% of the shares of a target for the significant increase in value is the increased value of company upon a two-thirds shareholder vote. A share ac- outbound transactions (a 93.9% increase from 2014), includ- quisition may also be made through a subscription of shares ing Tokio Marine’s acquisition of HCC Insurance Holdings issued by a target company. Generally, a listed company can and Itochu’s investment in CITIC Limited. As for domestic issue shares by a board resolution unless (i) the issue price transactions, both the number and the value increased – by is a deep discount from the market price or (ii) after the is- 6.7% and 47.1% respectively – during 2015. suance, the total outstanding shares exceed the authorised number of shares provided for in its articles of incorporation 1.2 Key Trends (see a discussion of certain new shareholders’ rights under After the peak in the Japanese M&A market in 2006, both the amended Companies Act in 3 Recent Legal Develop- in transaction numbers and values, the market suffered a ments). Even if the board approves an issuance that results downward trend until 2011, but began to pick up in 2012. in an acquirer holding a majority of the shares of the target It appears that growth will continue, given the desire of company, the acquirer is not required to offer to purchase corporate management in many Japanese companies to in- shares from the minority shareholders. crease their domestic market share and seek opportunities for growth outside the country. A business (asset) acquisition is generally conducted through either (i) a contractual buy-sell agreement or (ii) a statutory 1.3 Key Industries company split, which is a statutory spin-off procedure. Third In Japan, M&A activity is being seen in a wide range of party consents are required to effect a contractual business industries, including consumer goods, financial sectors, acquisition – for example, consents from counterparties chemical and electronics. Among the outbound transac- to transferred contracts and transferred employees are re- tions, Japanese insurance companies have been quite active quired. However, these consents are not statutorily required in acquiring overseas companies. In domestic transactions, in the case of a company split. Instead, the Companies Act the increase in mergers and integration among regional requires the parties to a company split to comply with vari- banks is one notable trend. ous procedures including the ones for creditor protection.

2.2 Primary Regulators 2. Overview of Regulatory Field The Financial Services Agency (the “FSA”) administers se- 2.1 Acquiring a Company curities regulations under the FIEA, including regulations A company is acquired in Japan either by (i) a share acquisi- involving tender offers, public offerings and proxy solicita- tion or (ii) a business (asset) acquisition. This can be accom- tions. plished through either (i) a contractual purchase of shares or business (assets) or (ii) a statutory business combination (or The Ministry of Finance, the Ministry of Economy, Trade corporate restructuring) conducted pursuant to the provi- and Industry and other relevant ministries regulate cross- sions of the Companies Act (ie a merger, share exchange, border transactions under the Foreign Exchange and For- share transfer or company split). A forward triangular busi- eign Trade Act (the “FEFTA”), including inward/outward ness combination (such as a merger whereby a merger sub- investments. sidiary of the acquirer merges with a target company whose shareholders receive the parent’s (acquirer’s) ) is per- The Japan Fair Trade Commission (the “JFTC”) regulates mitted under the Companies Act. transactions that substantially restrain competition under the Act on Prohibition of Private Monopolisation and Main- A share acquisition from one or more third parties (other tenance of Fair Trade (the “Antimonopoly Act”). than the company) may be made through either an “on- market” transaction or “off-market” transaction. While the The Tokyo , Inc. (“TSE”) and other stock rules under the Financial Instruments and Ex- exchanges oversee transactions involving a listed company. change Act (the “FIEA”) do not generally apply to market transactions, an off-market acquisition of shares of a listed 2.3 Restrictions on Foreign Investment company is subject to the tender offer rules if an acquirer The FEFTA provides some restrictions on foreign invest- seeks to acquire shares in excess of certain thresholds pro- ment in certain restricted businesses.

5 JAPAN Law & Practice Contributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita

A foreign investor is required to file prior notification with to other means for the acquisition of a target company or its the Minister of Finance and the competent minister for the business, such as a merger, company split, share transfer and business and wait a specified period (which may be extended business/asset transfer. up to five months) if: (i) the foreign investor intends to ac- quire shares of a private company (except an acquisition of 2.5 Labour Law Regulations shares of a private company from another foreign investor) The Japanese labour law regulations of primary concern to or more than 10% of the shares of a listed company; and an acquirer are restrictions on the ability of an employer (ii) the target company engages in certain restricted busi- to terminate employment agreements. An “at-will” employ- nesses identified in the FEFTA, including businesses regard- ment agreement is not legally permitted in Japan. Rather, ing national , public order or public security. After a dismissal can be found to be invalid if it lacks objectively the review, the ministers may order the foreign investor to reasonable grounds and is not considered to be appropriate change or discontinue the plan of investment. Although a in general societal terms (Article 16 of the Labour Contract wide variety of businesses are identified as a restricted busi- Act). Therefore, an acquirer should be aware that it may be ness under the FEFTA, orders to change or discontinue an difficult to undertake typical layoffs after the consummation investment have rarely been made. of an acquisition.

Otherwise, there are post-acquisition notifications required in connection with acquisitions by a foreign investor. An 3. Recent Legal Developments outward investment by a resident in Japan may also be sub- 3.1 Significant Court Decisions or Legal ject to a post-reporting obligation, a prior notification obli- Developments gation or the approval of the Minister of Finance, depending The most significant legal development in Japan in the last on the type of business of the investee. three years relating to M&A is the development of the juris- prudence concerning transactions which involve conflicts In addition, there are some restrictions on the holding of of interest of a director or controlling shareholder. Notwith- shares by a foreign investor in a company engaging in cer- standing a number of appraisal proceedings in which the tain types of businesses, such as airline and broadcasting court has addressed conflicts of interest issues in determin- businesses. ing the fair value of the shares of companies subject to ac- quisition or disposition transactions, the recent case of Rex 2.4 Antitrust Regulations Holdings (“Rex”), for the first time in Japan, considered the The Antimonopoly Act prohibits any acquisition that sub- duty of directors in a management . stantially restrains competition in a particular field of trade, or which would be conducted by using unfair trade practices. The directors of Rex, together with a private equity fund, acquired 100% of Rex’s shares through a tender offer and a Potential acquisitions that would exceed certain thresholds subsequent cash squeeze-out of the remaining sharehold- require prior notification to the JFTC. In particular, if a com- ers, each conducted at JPY230,000 per share. Dissenting pany with domestic sales (aggregated with domestic sales of shareholders who were subject to the squeeze-out filed an its group companies) of more than JPY20 billion intends to appraisal suit. acquire shares in a target company with domestic sales (ag- gregated with domestic sales of its subsidiaries) of more than Although the Tokyo District Court ruled in favour of Rex, JPY5 billion, and that acquisition results in holding more the Tokyo High Court held that the fair value of the shares than either 20% or 50% of the voting rights in the target in the squeeze-out should be JPY336,696 per share. After company, the acquiring company must file prior notifica- this decision was upheld by the Supreme Court, sharehold- tion of the plan of acquisition with the JFTC at least 30 days ers who did not participate in the appraisal suit filed a law- prior to the closing of acquisition. If the JFTC determines suit against Rex’s directors and statutory auditors, claiming during this 30-day period (the first phase review) that more a breach of their duties of care, and demanded an amount extensive review is necessary, it proceeds to a second phase equivalent to the difference between the tender offer price review. The period of the second phase review is up to 120 (or squeeze-out price) (ie JPY230,000) and the fair price de- days from the prior notification or 90 days from the accept- termined by the Tokyo High Court in the appraisal suit (ie ance by the JFTC of all information which it requests the JPY336,696). One primary issue in the Rex case was whether acquiring company to provide, whichever is the later. If the the release of an amendment to the earnings forecast of the JFTC determines that an acquisition violates the Antimo- company that was released a few months prior to the launch nopoly Act, the JFTC may order the party to take measures of the tender offer and that adjusted such earnings forecast to eliminate the antitrust concerns, including a disposition downward was aimed at manipulating the market price of of shares and assets. Similar filing requirements and subse- the company to lower the tender offer price. quent procedures pursuant to the Antimonopoly Act apply

6 Law & Practice JAPAN Contributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita

After the Tokyo District Court dismissed the claim and Under the amended Companies Act, a “special controlling found that the directors did not breach their duty, on ap- shareholder” of a company (ie a shareholder holding 90% peal, the Tokyo High Court held that the directors’ duty of the voting rights of a company) has the right to force the of care must be exercised for the common interests of the other shareholders in the company to sell their shares to shareholders and established for the first time in Japan that the special controlling shareholder (“Squeeze-out Right”). the directors in a management buyout owe (i) a duty to en- To exercise the Squeeze-out Right, the special controlling sure that the fair corporate value is transferred among the shareholder must first notify the board of the target com- shareholders and (ii) a duty to disclose adequate information pany of certain particulars of the squeeze-out, including the to ensure informed decision-making by the shareholders. amount of consideration, and obtain the target company’s approval to proceed. When the board approves the squeeze- While the Tokyo High Court held in the Rex case that there out, the target company must then notify its shareholders of was no breach of the duty to transfer the fair corporate value the particulars of the squeeze-out or make a public notice among the shareholders because a third party re- on or before the 20th day prior to the date of acquisition of port obtained by Rex indicated that the tender offer price shares pursuant to the squeeze-out. had a sufficient premium over a price valuation calculated by several methods, the court found that the directors breached The Squeeze-out Right is mainly used following a tender their duty to disclose adequate information because the di- offer, although it could theoretically also be used in oth- rectors did not disclose the fact that a management buyout er situations. If the acquirer is unable to achieve the 90% was in preparation when the company issued the press re- threshold in a tender offer, the acquirer may still implement lease announcing the downward adjustment of the earnings a wholly callable scheme or other scheme that would require forecast. The court did not grant monetary damages to the two-thirds of the voting rights. Whether or not a top-up op- plaintiff shareholders, however, because it held that even if tion may be utilised under Japanese law to achieve the 90% that fact had been disclosed, if the tender offer failed (such threshold is still under further discussion by the practition- that the shareholders would continue to hold the shares of ers and scholars. Rex as a listed company), the shareholders would not have been able to obtain in the market an amount higher than the The amendments to the Companies Act allow the special tender offer price because Rex’s financial results at the time controlling shareholder to acquire stock options and con- of the tender offer were deteriorating. vertible bonds as well as shares, which is not possible under the wholly callable share scheme. As described above, the court in the Rex case only addressed the directors’ duties in the context of a management buyout, Upon the exercise of the Squeeze-out Right, dissenting but the impact of the decision may extend to other transac- shareholders will have a right to exercise appraisal rights. tions involving conflicts of interest and may be a milestone In addition, if the exercise of the right would violate law or in the development of jurisprudence regarding directors’ the company’s articles of incorporation or the consideration duties in M&A transactions in general. In fact, another low is grossly improper, the dissenting shareholders will have a court has referred to this Rex case decision in its holding right to seek an injunction. (though in the context of a management buyout). The amendments to the Companies Act include some other 3.2 Significant Changes to Takeover Law changes that impact M&A transactions, including: The FIEA, the primary regulation that governs of public companies, has not been changed in any significant • the addition of a right of shareholders holding at least 10% way since 2014. However, amendments to the Companies of voting rights to request a shareholders’ meeting if a pro- Act of Japan that came into full effect in May 2015 have had posed issuance of new shares to a third party would result some impact on takeovers of public companies. The amend- in a change of control; ments to the Companies Act include, among other things, • a new requirement for a special resolution of shareholders the introduction of an express squeeze-out right. to authorise a disposition of shares in any material sub- sidiary (ie if the book value of the shares in the subsidiary As described in 6.8 Squeeze-Out Mechanisms , due to pos- represents at least 20% of the company’s assets) that results sible taxation on the assets of the target company, and prior in a change of control of the subsidiary; to the aforementioned amendments to the Companies Act, • imposition of successor liability in the case of a fraudulent a cash-out merger had been rarely used in Japan and a more spin-off or business transfer; complex “wholly callable share scheme” was more common • streamlining of regulations on stock combinations that can for minority squeeze-out transactions. be used for a cash squeeze-out; and • addition of injunctive relief in limited situations.

7 JAPAN Law & Practice Contributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita

4. Stakebuilding 4.3 Hurdles to Stakebuilding As further described in 9.3 Common Defensive Measures , 4.1 Principal Stakebuilding Strategies some Japanese listed companies have adopted, in most cases A bidder who is not willing to wage a hostile takeover usu- by a resolution of a shareholders’ meeting, takeover defence ally avoids building a stake as a “toehold” before launching measures that prevent an acquirer from acquiring shares in an offer in Japan. In Japan, the building of a toehold with- the company in excess of a certain threshold. The threshold out notice to target management is viewed as having the is generally set between 15% and 30% (20% in most cases). potential to negatively affect management’s willingness to Also, as further described in 6.2 Mandatory Offer Thresh- accept an acquisition offer, and the resistance of manage- olds , an acquisition of shares of a listed company may be ment to a takeover may significantly lower the chance of a subject to the tender offer rules under the FIEA, which pro- successful takeover, since few hostile takeover attempts have hibits a bidder from acquiring more than one-third of the succeeded in Japanese M&A history. Furthermore, there is voting rights of the target company through off-market trad- an experimental study indicating that a bidder’s ownership ing or off-floor trading. ratio in a target company prior to launching an offer did not lower the subsequent tender offer premiums paid by the 4.4 Dealings in Derivatives bidder in Japan. Should a bidder decide to build a toehold, Dealings in derivatives are allowed in Japan. A bidder may it would purchase the shares on the market or through a purchase derivatives regarding shares in a target company private transaction with one or a limited number of principal to build an economic stake in that target company or hedge shareholders. risks regarding its shares in the target company.

4.2 Material Shareholding Disclosure Thresholds 4.5 Filing/Reporting Obligations A shareholder is required under the FIEA to file a large-scale Equity derivatives may be subject to the large-scale share- shareholding report with the relevant local finance bureau holding reporting obligations. Options pertaining to shares within five business days after its shareholding ratio in a list- may trigger disclosure if, upon exercise, they would result ed company exceeds 5%. When calculating the shareholding in excess of a 5% shareholding. However, holding equity de- ratio, the shares held by a joint holder are aggregated. A joint rivatives which are cash-settled and do not transfer the right holder includes (i) certain affiliates and (ii) another share- to acquire shares would not be likely to trigger disclosure. holder with whom the shareholder has agreed on jointly ac- According to the relevant guidelines issued by the FSA, de- quiring or transferring shares in the target company, or on rivatives that transfer only economic profit/loss in relation jointly exercising the voting rights or other rights as a share- to target shares, such as total return swaps, are generally holder of the target company. After filing the report, if the not subject to disclosure. However, even holding such cash- shareholding ratio increases or decreases by 1% or more, an settled equity derivatives may trigger disclosure, if a holder amendment to the report must be filed within five business purchases long positions on the assumption that a dealer days from that increase or decrease. Financial institutions will acquire and hold matched shares to hedge its exposure that trade securities regularly as part of their business and (instead of cash settlement). satisfy certain requirements under the FIEA are required to file the report only twice a month. 5. Negotiation Phase In a large-scale shareholding report, a shareholder must 5.1 Requirement to Disclose a Deal disclose: If the target company is a listed company, it must disclose the deal when the board approves the contemplated transaction. • information about the shareholder’s identity; Typically, this approval is given on the day that a definitive • the purpose of the shareholding; agreement is to be signed by the target company, and the • any intention to make a proposal that would materially disclosure is made on the same day. affect the issuer’s business (including a proposal of an ac- quisition or disposition of material assets, a large amount of In general, there is no legal requirement to disclose the deal borrowings, an appointment or dismissal of a representa- when the target company is first approached or when nego- tive director, a material change of board composition, or a tiations commence. If a non-binding letter of intent is signed merger, company split or any other business combination); by the target company, the deal is sometimes (but not very • the number and ratio of the shares; commonly) disclosed. In those cases where disclosure is • acquisitions and dispositions of the issuer’s shares con- made at an early stage, the purpose is often to allow the par- ducted during the last 60 days; ties to discuss the deal openly with a wider group of relevant • certain material terms of any material agreement regarding organisations or personnel. For example, if the transaction the shares held by it; and might require the competition authorities to conduct third • funds used to acquire such shares. party hearings, the parties may prefer to disclose the trans-

8 Law & Practice JAPAN Contributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita action sooner rather than later and to discuss the possibility viewed by Japanese listed companies as being unfriendly of the transaction with the authorities in order to expedite bidders. Therefore, any acquisition of shares in advance of a the authorities’ review. There may also be cases where a large negotiated transaction might jeopardise the friendly nature transaction might require the parties to involve a broader of the transaction. range of their employees for the due diligence, and therefore the parties may elect to disclose the transaction at an early If the target company is a listed company, it is not always the stage to avoid a failure to maintain the secrecy of the transac- case that the target company will grant exclusivity (eg a com- tion during the due diligence process. mitment by the target company not to negotiate a similar deal with any other third party for a certain length of time) 5.2 Market Practice on Timing to a particular bidder. However, for example, a financially Recently, significant attention has been paid to the manner distressed target company may offer exclusivity to a poten- in which the target company should handle a leak of infor- tial sponsor with the aim of soliciting the sponsor to con- mation in the market. Where there is a leak of information sider and negotiate the deal. Exclusivity may also be agreed concerning a listed company that would have a material im- upon to bind both the acquirer and the target company in pact on investors’ decisions, the TSE will make inquiries of the context of a business integration (such as a merger) of the listed company and, if necessary, may require it to make the two parties. timely and appropriate disclosure of the matter. In May 2014, the TSE introduced a new rule whereby the TSE may provide 5.5 Definitive Agreements an alert to investors if it considers it necessary to do so when It is permissible but not very common for an acquirer and leaked information is unclear or otherwise requires the at- the target company to document a tender offer (commonly tention of investors to gain information of the relevant listed followed by a second-step cash squeeze-out of the remaining company or its shares. minority shareholders who did not participate in the tender offer if an acquirer intends to acquire 100% of the shares of 5.3 Scope of Due Diligence the target) in a definitive transaction agreement. Procedur- In a negotiated transaction, due diligence generally includes ally, the target company will be required to disclose its opin- a comprehensive review of the target company’s business, ion with regard to the contemplated tender offer, including legal, financial/accounting and tax matters. The scope of due the grounds and reasons for the opinion, the second-step diligence may vary, depending on the size and nature of the process in a two-step acquisition structure and any policy deal or any time constraints in the parties’ negotiations, and or plans after the tender offer. Therefore, typically the target may be focused on material issues by setting a reasonable company does not take any actions that would be inconsist- materiality threshold. ent with the process outlined in its own disclosure, even if there is no such documentation between the acquirer and Depending on the level of antitrust issues involved, the par- the target company. In addition, it is likely that a target com- ties may be restricted from exchanging certain competitively pany would not want to enter into an agreement that would sensitive information during the due diligence so as to avoid bind the target company’s board to support the transaction so-called “gun-jumping” issues under the Antimonopoly regardless of any future competitive offers from third parties, Act. In short, the parties must operate as separate and inde- unless at a minimum it includes a fiduciary out provision pendent entities until the applicable waiting period under that would allow the target’s directors to avoid a breach of the Antimonopoly Act has expired, and therefore the parties their duties of care and loyalty. must not engage in conduct that could facilitate unlawful co-ordination during that period. In such cases, employees It is more common, however, immediately prior to the launch who may be in a position to use confidential information of the tender offer, for a buyer and principal shareholder of for purposes other than due diligence, such as anyone with the target company to enter into an agreement where the responsibilities regarding sales or marketing of the parties’ shareholder agrees to tender its shares in the contemplated competing products, generally should not have access to tender offer. See6.9 Irrevocable Commitments. such information.

5.4 Standstills or Exclusivity 6. Structuring In a friendly transaction, a standstill provision (which gener- 6.1 Length of Process for Acquisition/Sale ally prohibits the potential acquirer from acquiring the target The length of the process for acquiring or selling a business company’s shares outside a negotiated transaction) is not can vary, depending on a number of factors, including the very common in Japan. However, even if there is no standstill size and type of assets being acquired or sold, the type of the provision, as described in 4 Stakebuilding in practice those target company (whether public or private), the level of due bidders acquiring the shares of the target company without diligence required and the length of time needed to obtain the target company’s prior consent have traditionally been required regulatory approvals.

9 JAPAN Law & Practice Contributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita

An auction will normally be structured as a two-phase pro- affiliated partiestokubetsu ( kankeisha) of the acquirer (on cess. In phase one, the seller will usually require the potential an as exercised and as converted to basis). buyers to submit a non-binding indication of interest, which typically will address, among other things, the indicative of- The one-third threshold for this purpose derives in part fer price, proposed deal structure, possible conditions that from the requirement under the Companies Act for a special the buyer may seek, and necessary regulatory approvals. In resolution of the shareholders for certain important actions phase two, a few selected buyers will be given access to the (eg merger, amendment to the articles, dissolution), which data room for due diligence and will be required to submit requires approval by two-thirds of the voting rights present their final bid, together with a mark-up of the draft transac- at the relevant shareholders’ meeting. Therefore, ownership tion agreement circulated by the seller. After final bids are of one-third of the voting rights will effectively grant the submitted, the seller will seek to negotiate and finalise the shareholder a veto right over any special resolution of the transaction agreement quickly so that the signing can occur shareholders at a shareholders’ meeting. as soon as practically possible. After the signing, the parties will seek any applicable regulatory approvals or clearances In addition to the One-Third Rule above, a few other situa- for the transaction, such as antitrust clearance and any re- tions where a mandatory tender offer is required are gener- quired prior notification under the FEFTA (see 2 Overview ally summarised as follows: of the Regulatory Field). • 5% Rule – if the total shareholding ratio of the acquirer In an acquisition involving a tender offer, the tender offer exceeds 5% as a result of an off-market purchase. An ex- period must be set between 20 and 60 business days. If the ception applies to the 5% Rule if the acquirer has not pur- acquisition is effected through a two-step process where the chased shares in off-market trading from more than ten tender offer is followed by a second-step squeeze-out of the sellers in aggregate during the 60 days before the day of remaining minority shareholders who did not participate the purchase on which the threshold is crossed (ie during a in the tender offer, the process of the second step will de- 61-day period including the date of the threshold-crossing pend on the level of shareholding that the acquirer owns purchase). after the first-step tender offer. If the acquirer owns 90% of • Rapid Buy-Up Rule – if the total shareholding ratio of the the voting rights of the target company, the acquirer can acquirer exceeds one-third as a result of the acquisition of complete the second step rather quickly (typically around shares within a three-month period, whereby: (i) the ac- one month) by exercising the Squeeze-out Right (see 6.8 quirer accumulates more than a 10% shareholding through Squeeze-Out Mechanisms). In cases where the acquirer is on-market trading, off-market trading and subscription of unable to achieve the 90% threshold in the first-step tender newly issued shares from the company; and (ii) that ac- offer, the second step will usually take a few months, because cumulation includes an accumulation of more than 5% in those cases the second step will require Squeeze-Oiute the through off-market and off-floor trading (ie trade-sale-type target company to convene a shareholders’ meeting and to market trading). The Rapid Buy-Up Rule was introduced complete the court permission procedures (see 6.8 Squeeze- in 2006 with the primary aim of capturing a combination Out Mechanisms). of on-market and off-market trading or a combination of off-market trading and new share issuances, which in each 6.2 Mandatory Offer Threshold case would result in an acquirer holding more than a one- With respect to a listed company (and some other types of third total shareholding ratio. This effectively means that, companies), the FIEA provides specific requirements for a for example, if an acquirer obtains 30% of the voting shares mandatory tender offer. Overall, the primary threshold for through off-market trading, it cannot then purchase addi- a mandatory tender offer is one-third of the voting rights of tional shares during the next three-month period at mar- the target company (the “One-Third Rule”). Therefore, sub- ket, off market (including a tender offer) or otherwise that ject to certain limited exceptions, an acquirer must conduct would result in its shareholding ratio exceeding one-third. a tender offer if the “total shareholding ratio” kabukentou( • Counter Tender Offer Rule – if, during the period in which shoyu wariai) of the acquirer exceeds one-third after the pur- there is an ongoing tender offer by a third party, an acquirer chase and the purchase is made in off-market trading or off- with an existing shareholding ratio of more than one-third floor trading (ie trade-sale-type market trading). This means purchases more than a 5% additional shareholding. The that an acquirer cannot obtain, for instance, a 40% stake Counter Tender Offer Rule effectively captures on-market of voting shares from the principal shareholder of a listed trading, because off-market trading resulting in a total company through a private buy/sell transaction. The “total shareholding ratio exceeding one-third will be subject to shareholding ratio” is defined in detail in the FIEA and the the One-Third Rule in any event. calculation generally includes the aggregate voting rights of the target company held by the acquirer and certain special

10 Law & Practice JAPAN Contributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita

6.3 Consideration typically quite limited, such as necessary shareholder ap- While cash is more commonly used as consideration in ac- proval and regulatory approvals and clearances. A financing quisitions, the type of consideration varies depending on the condition is not commonly used in a business combination nature and structure of the acquisition. because, as explained in 6.3, stock is more commonly used as the consideration for a business combination. In a share purchase or business transfer, the consideration is predominantly cash-only. An exchange offer through which 6.5 Minimum Acceptance Conditions the acquirer offers its own securities as consideration in a A minimum acceptance condition is permitted for a tender tender offer is legally permitted and there is special legisla- offer. Where a minimum acceptance condition is specified tion specifically relaxing the rules related to such exchange in the tender offer registration statement, the acquirer will offers under certain circumstances where the transaction is not purchase any shares if the number of shares tendered is pre-approved by the relevant government ministries. How- lower than that specified minimum number. If a minimum ever, the use of an exchange offer has not developed in prac- acceptance condition is set at the commencement of the ten- tice in Japan, due to unresolved taxation issues applicable to der offer, that minimum threshold may not be increased by the selling shareholders (the taxation is not deferred in the the acquirer, but the acquirer may decrease or remove the case of an exchange offer). condition.

In a statutory business combination, such as a merger, share In a 100% acquisition deal, the minimum acceptance condi- exchange or company split, stock is more commonly used tion is typically set such that the voting rights held by the as consideration, although cash or another consideration is acquirer after the tender offer will reach two-thirds of the legally permitted and it is often seen in the case of a com- target company’s voting rights on a fully diluted basis. The pany split. ownership of two-thirds of the voting rights of the target company will ensure that the acquirer will be able to pass A mix of cash and stock is not common in Japan. However, a special resolution of the shareholders at a shareholders’ a cash tender offer followed by a second-step stock-for-stock meeting (eg merger, amendment to the articles, dissolu- merger or share exchange is often seen and this structure tion). The acquirer will then proceed to the second step of effectively provides the shareholders with the choice of cash the acquisition to squeeze out any remaining shareholders or stock. who did not tender their shares in the tender offer (see 6.8 Squeeze-Out Mechanisms). 6.4 Common Conditions for a Takeover Offer The FIEA strictly regulates tender offer conditions and per- If an acquirer does not seek 100% ownership of the target mits the withdrawal of a tender offer only upon the occur- company, the minimum acceptance condition is typically rence of certain narrowly defined events. Those withdrawal set such that the voting rights held by the acquirer after the events must also be specifically provided in the tender offer tender offer will be a majority of the voting rights of the registration statement. The withdrawal events include: target company on a fully diluted basis. The majority owner- ship will allow the acquirer to pass an ordinary resolution of • a decision by the target company to make a material the shareholders at a shareholders’ meeting (eg election of change, such as a merger, reduction of capital stock split directors, dividend). The primary purpose of a deal of this and issuance of new shares; type is typically to allow the shares of the target company to • the occurrence of a material event with respect to the target continue to be listed on a stock exchange. company, such as damage due to a natural disaster; • the failure to obtain regulatory approvals; and In addition, the acquirer may also set a maximum number • the occurrence of a material event with respect to the ac- of shares to be purchased by the acquirer, provided that the quirer, such as dissolution and bankruptcy. total shareholding ratio of the acquirer after the tender of- fer will remain less than two-thirds (which means that the A financing condition is not permitted and the acquirer acquirer cannot set that maximum at a level of two-thirds must prepare as part of the tender offer registration state- or higher). If the number of shares tendered exceeds that ment a document evidencing prearranged financing on a maximum number, the acquirer must purchase the tendered firmly committed basis. If the prearranged financing is sub- shares on a pro rata basis. If, for instance, a bidder sets both ject to conditions, the substance of these conditions is gener- a minimum and maximum at the level of a simple majority, ally required to be described in the statement. a majority acquisition can be achieved without purchasing all shares tendered. 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

11 JAPAN Law & Practice Contributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita

6.6 Additional Governance Rights of these alternative schemes normally takes a few months, as If an acquirer does not seek 100% ownership of the target the process requires the target company to convene a share- company, the acquirer may seek certain contractual protec- holders’ meeting and to complete certain court permission tions, such as a right to designate members of the company’s procedures (as described below). In the shareholders’ meet- board of directors, veto rights over certain material matters, ing, the acquirer can vote by proxy. A straightforward cash- and information rights to receive periodic financial informa- out merger or other statutory business combination is legally tion and business reports. However, if the target company permitted under the Companies Act, but is generally not is a listed company, such protections may be quite limited used because it would not be “tax qualified”, meaning that because the target company will not be likely to accept such the target company would be required to revalue its assets protections of the acquirer from a corporate governance at the then-current market value basis and recognise taxable standpoint. gains from the transaction.

6.7 Voting by Proxy In the share cancellation scheme, the target company will In certain circumstances, shareholders can vote by proxy. See implement a share cancellation in which the ratio of share 6.8 Squeeze-Out Mechanisms. cancellation is set so that the shares held by each minority shareholder will become less than one full share of the target 6.8 Squeeze-Out Mechanisms company. As the amended Companies Act introduced cer- In a tender offer for 100% of a listed company, the remaining tain protection mechanisms for the minority shareholders, shareholders who did not tender their shares in a successful such as the appraisal right and the right to seek injunction tender offer will generally be squeezed out through a second- under certain circumstances, the share cancellation scheme step squeeze-out mechanism. is now considered a viable option whereby to implement the second-step squeeze-out. In the wholly callable share In practice, if the acquirer owns 90% of the voting rights of scheme, the target company technically recharacterises its the target company after the first-step tender offer (thereby common stock as a type of redeemable share (so-called becoming a “special controlling shareholder”), the acquirer “shares wholly subject to call” (zembushutoku joukou tsuki will usually complete the second step by exercising a statu- shurui kabushiki)) that can be called/redeemed by the tar- tory right to force the other shareholders to sell their shares get company in exchange for a new class of shares. Similar to the special controlling shareholder (the “Squeeze-out to the share cancellation scheme, the exchange ratio under Right”), which is a newly introduced mechanism under the the wholly callable share scheme is set so that each minor- amended Companies Act. To exercise the Squeeze-out Right, ity shareholder receives less than one full share of this new the special controlling shareholder must first notify the class of shares. board of the target company of certain particulars regard- ing the squeeze-out, including the amount of consideration, In completing the share cancellation scheme or the wholly and obtain the target company’s approval to proceed. When callable share scheme, there is a procedure under Japanese the board approves the squeeze-out, the target company law whereby the fractional interests that would be allocated must then notify its shareholders of the particulars of the to the minority shareholders will instead be sold by the tar- squeeze-out or make a public notice on or before the 20th get with court permission, with the minority shareholders day prior to the acquisition date. Upon the exercise of the receiving cash, usually in an amount substantially equivalent Squeeze-out Right, dissenting shareholders will have a right to the offer price used in the first-step tender offer. to exercise appraisal rights. In addition, if the exercise of that right would violate law or the company’s articles of incor- The wholly callable share scheme used to be a primary op- poration or the consideration is grossly improper, the dis- tion for the second-step squeeze-out but is less likely to be senting shareholders will have a right to seek an injunction. used after the 2015 amendment to the Companies Act. It Whether or not a top-up option often used in the USA may looks as if the “share cancellation scheme” will now be com- be utilised under Japanese law to achieve the 90% threshold monly used in cases where the acquirer does not own 90% is still under further discussion. of the voting rights of the target company.

In cases where the acquirer is unable to achieve the 90% 6.9 Irrevocable Commitments threshold in the first-step tender offer, it may still implement If there is a principal shareholder of the target company, it is the second-step squeeze-out through other means, such as relatively common for the acquirer to obtain an irrevocable the so-called “share cancellation scheme” or the previously commitment from the principal shareholder to tender its often used “wholly callable share scheme”, in each case to the shares in the target company in the contemplated tender of- extent that the acquirer holds two-thirds of the voting rights fer. The commitment will be made in a written agreement of the target company (ie the threshold to pass a special reso- (oubo keiyaku) which is negotiated prior to the announce- lution at the target company’s shareholders’ meeting). Each ment of the transaction by the parties. Where such a com-

12 Law & Practice JAPAN Contributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita mitment exists, material terms of the commitment are dis- release unless the bid is unsolicited). However, in certain closed in the tender offer registration statement. exceptional situations, a bid is publicly announced by the bidder and the target company in advance of the commence- The commitment may be negotiated to include a certain level ment of the tender offer, such as when earlier public disclo- of representations and warranties by the principal share- sure would be required in order to obtain merger clearance holder in relation to the business of the target company. It is in certain jurisdictions. also possible for the parties to negotiate a clause where the principal shareholder will be required to revoke its tender 7.2 Types of Disclosure upon the occurrence of certain events (eg material breach of When an acquisition is made by a statutory business combi- representations and warranties by the principal shareholder nation (eg merger, corporate split, share exchange or share or failure of the target company’s board to recommend the transfer) whereby the acquirer’s shares are issued as consid- contemplated transaction to the shareholders). However, by eration, the filing of a security registration statement by the a combination of this clause and the minimum acceptance acquirer is required if (i) there are at least 50 shareholders condition (that would not be satisfied but for the tender by of the target company and the target company is a reporting the principal shareholder), the acquirer could essentially company under the FIEA, and (ii) no security registration withdraw the tender offer in circumstances that would not statement has already been filed in relation to the same class constitute permissible withdrawal events under the FIEA. of shares as the shares to be issued upon such a statutory The regulator (FSA) has interpreted this type of clause as business combination. For example, if a foreign purchaser being subject to the strict tender offer withdrawal restric- acquires a Japanese listed company by way of a triangular tions under the FIEA (as explained above). For example, the merger and issues the shares of the foreign purchaser as agreement by a principal shareholder to revoke its tender on consideration of the merger, the foreign purchaser will be the failure of obtaining financing by a bidder would not be required to file a security registration statement unless it permitted because this falls outside the scope of the statuto- has already become a reporting company in Japan under rily defined withdrawal events under the FIEA. the FIEA.

Whether this type of commitment agreement includes a 7.3 Requirement for Financial Statements clause that would permit the principal shareholder to re- For a tender offer, the bidder must disclose in the tender of- fuse to tender in the event that a competing bid is made by a fer registration statement its financial statements, prepared third party at an offer price higher than the tender offer price in accordance with Japanese GAAP for the latest fiscal year, varies, depending on the type of principal shareholder (eg together with any quarterly or half-year financial statement a founder, senior management, a private company, a listed after the date of the most recent full-year financial state- company) and other factors. This is a matter of negotiation ments. If the bidder is a foreign entity, it may provide finan- and may be incorporated in the commitment, particularly if cial statements prepared in accordance with the GAAP of the deal did not involve an auction process and the principal its home country, with explanatory notes as necessary, to shareholder is interested only in the financial aspects of the explain certain differences with Japanese GAAP, in lieu of transaction. Japanese GAAP financial statements.

When a business combination requires the filing of a secu- 7. Disclosure rity registration statement, the offeror must disclose, in the 7.1 Making a Bid Public security registration statement, its financial statements for If an acquisition is made by a tender offer to the shareholders the last two fiscal years, together with any quarterly updates, of a listed company, a bidder must publicly announce the bid prepared in accordance with Japanese GAAP. However, a at the beginning of the tender offer by (i) a press release, (ii) foreign offeror may produce financial statements prepared public notice of the tender offer and (iii) a tender offer reg- in accordance with the accounting standards of its home istration statement. Items (ii) and (iii) are required pursuant country or any other country in each case with the specific to the FIEA and are to be made or filed on the tender offer approval from the Minister for Financial Services of Japan. commencement date. As the press release in item (i) is only required by the stock exchange regulations, if the bidder is 7.4 Disclosure of the Transaction Documents not a listed company, the bidder is not required to issue a Disclosure of transaction documents in full is not required press release, although the target listed company is required for a tender offer. If there are any agreements between the to issue a press release immediately after it has formed an bidder and the target company or its officers in relation to opinion (regarding its endorsement or not) on the tender the tender offer itself or a disposal of material assets after the offer. If the bidder’s press release is required, it is usually tender offer, the material terms of such agreements must be made one business day before the tender offer commence- described in the tender offer registration statement. ment date (simultaneously with the target company’s press

13 JAPAN Law & Practice Contributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita

For a business combination, the Companies Act requires pending on each case, and differ substantially from special the parties to the business combination to prepare an agree- committees as used in the USA. In most cases, the special ment providing for statutorily required matters. A statuto- committees established in Japan were composed of outside rily required agreement such as a merger agreement, share corporate auditors (shagai kansayaku) and/or independent exchange agreement or company split agreement must be experts such as lawyers, certified public accountants and in- disclosed in full. However, in practice, such an agreement vestment bankers or other business professionals. Only a few only addresses the matters required by law and is thus very special committees included outside directors as members, short. In many cases, the parties to a business combination although this trend may change as many listed companies enter into another agreement to provide in detail the terms are now appointing more outside directors in response to of the business combination, in which case, only the material changes to the Corporate Governance Code. Also, less than terms of such an agreement need be disclosed in the security half of these special committees were granted the authority registration statement (if the filing of the security registra- to negotiate the terms of the transaction with the acquirer, tion statement is required as previously discussed) and the and it was rare for a special committee to retain its own legal press release pursuant to the stock exchange regulations (if and financial adviser. In most cases, the special committees the party is a listed company). referred to the valuation report that was prepared by the financial adviser to the target company.

8. Duties of Directors 8.3 Business Judgement Rule 8.1 Principal Directors’ Duties Other than management buyouts, it is still not very common Under the Companies Act, as a general principle, directors in Japan to establish an ad hoc special committee in an M&A owe a duty of care as a good manager, and a duty of loyalty to transaction, even if the transaction involves conflicts of in- the company and, indirectly, to the shareholders of the com- terest such as a merger between a controlling shareholder pany. However, as illustrated in some recent cases (including and its subsidiary. If the subsidiary is a listed company, the the Rex case described in 3.1 Significant Court Decisions or stock exchange regulations require the listed subsidiary com- Legal Developments), the prevailing view is that the direc- pany to obtain an opinion from an independent third party tors owe a duty to give due regard to the common interests of to confirm that the proposed business combination with a shareholders. Nonetheless, this duty would not extend to all controlling shareholder would not be disadvantageous to the stakeholders, such as creditors or employees of the company. subsidiary company’s minority shareholders. Such an inde- pendent opinion is usually provided by an outside corporate Except for violations of law or situations involving a con- auditor or a lawyer, not by a special committee. flict of interest, the business judgement rule generally ap- plies in determining whether directors have breached their 8.4 Independent Outside Advice duties. Under the business judgement rule in Japan, direc- It is common for directors of a company in an M&A trans- tors are not held accountable for their decision unless (i) action to obtain financial, tax and legal advice from outside the directors were careless and failed to recognise relevant experts. Obtaining a valuation report from an independent facts in making their decision or (ii) either the process of outside financial adviser is recognised as a prerequisite to the decision-making or the substance of the decision was ensure fairness and transparency. In practice, a valuation particularly unreasonable or inappropriate. There have not report is obtained by the target company in almost all tender been many judicial precedents addressing directors’ duties offers and by both parties in many statutory business com- in M&A transactions, although it is generally understood by binations such as mergers. In some cases, in addition to the M&A practitioners that the business judgement rule gener- valuation report, directors obtain a from an ally applies to directors in M&A transactions. However, as outside financial adviser, but this is not a prerequisite. 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 9. Defensive Measures directors’ actions in such transactions with a heightened 9.1 Hostile Tender Offers level of judicial scrutiny in recent years. Hostile tender offers are permitted but are not common in Japan. Historically, there have been many cross-share- 8.2 Special or Ad Hoc Committees holdings between Japanese companies which were never Use of an ad hoc special committee in M&A transactions unwound, even when the share price significantly declined involving conflicts of interest is becoming common in Ja- or an acquirer offered to buy the shares at a much higher pan. In almost all cases of management buyouts in recent price than market price. In particular, Japanese banks, in- years, boards of directors have established an ad hoc special surance companies and other financial institutions held the committee to review the management buyout. However, the shares of many listed companies and played a role as “stable” composition and the authority of these committees vary, de- shareholders. Although the level of such cross-shareholdings

14 Law & Practice JAPAN Contributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita has decreased for various reasons, there still remain cross- comply before starting an acquisition. No stock or stock op- shareholdings at a lower rate. Many such “stable” sharehold- tion is issued to the shareholders at the time of adoption of ers tend to be reluctant to tender their shares in a target this type of defensive measure. Under the procedure, the ac- company in a hostile tender offer, considering their busi- quirer has to provide the board of directors with information ness relationship with the target company. Hence, few hostile regarding the acquirer and its acquisition plan, and ensure tender offers have been successfully consummated thus far. necessary time for directors to consider the plan and prepare alternatives and for shareholders to consider which plan is 9.2 Directors’ Use of Defensive Measures better for shareholders’ interest. A committee composed of There is no case law in Japan clearly setting out the param- members who are independent from the management of the eters of legally permissible defensive measures or the direc- company is usually established, and the committee makes a tors’ duties in adopting such measures. However, there have recommendation as to the company’s response to the pro- been several cases that indicate the factors to be considered posed acquisition. If the company determines that the bidder in determining the legality of defensive measures. has not complied with the procedures set by the company or that the proposed acquisition would cause clear harm to Defensive measures to ensure necessary time and infor- the corporate value and common interests of shareholders, it mation for shareholders to consider an offer would allot stock options to all shareholders without contri- The Tokyo District Court held in 2005 that directors may bution that are only exercisable by, or callable for new shares take reasonable defensive measures to ensure necessary in- by the company with respect to, those shareholders other formation and a reasonable period for shareholders to con- than the acquirer, resulting in a dilution of the shareholding sider whether the shareholders should entrust the manage- ratio of the acquirer. ment of the company to incumbent directors or an acquirer. In most case, it is provided that the board of directors may Defensive measures to hold off a takeover attempt because also confirm shareholders’ intentions concerning an allot- it is substantively inappropriate ment of such options by convening a shareholders’ meet- The Tokyo High Court held in 2005 in the Livedoor v Nip- ing. As of the end of July 2015, 480 listed companies have pon Broadcasting case that, where there is a contest for ob- adopted these types of measures (13.4% of the total listed taining control of a company, defensive measures are gen- companies in Japan). erally not allowed for the primary purpose of lowering the acquirer’s shareholding ratio and maintaining or ensuring 9.4 Directors’ Duties incumbent management’s control of the company. However, As discussed in 8 Duties of Directors directors have a duty if there are exceptional circumstances where the defensive of care as a good manager and a duty of loyalty to the compa- measures are justified in the context of protecting the inter- ny, and the business judgement rule is generally available for ests of shareholders as a whole, defensive measures may be directors’ decisions in Japan. Laws and court precedents do allowed as long as they are necessary and reasonable. not clearly provide that an intermediate or heightened level of review (like the Unocal standards – enhanced scrutiny) In Japan, directors often propose the implementation of apply to directors’ decisions where they implement defen- defensive measures at a shareholders’ meeting, rather than sive measures. The Tokyo High Court held in the Livedoor v making their own final decision on these matters. With re- Nippon Broadcasting case, however, that defensive measures gard to defensive measures approved by shareholders, the implemented by incumbent directors are not allowed unless Supreme Court in 2007 held in the Steel Partners Japan Stra- they are justified in the light of the protection of the interests tegic Fund v Bull-Dog Sauce case that it was permissible of shareholders as a whole. under the equitable doctrine for a company to allot stock options to all shareholders that are only exercisable by, or 9.5 Directors’ Ability to “Just Say No” callable for new shares by the company with respect to, those Directors cannot “just say no” against a hostile takeover at- shareholders other than the hostile acquirer, as long as such tempt. allotment is necessary and reasonable to protect the com- mon interests of shareholders from the probable damages to be caused by the bidder. 10. Litigation 10.1 Frequency of Litigation 9.3 Common Defensive Measures In general, it is not very common in Japan for shareholders Most common hostile takeover defensive measures adopted or other stakeholders in a company to bring litigation against by Japanese listed companies before a hostile acquirer actu- the company or its directors in connection with M&A trans- ally emerges belong to the so-called “pre-warning” type of actions. Under Japanese law, it is not easy for stakeholders defensive measure. The company sets and publicly discloses to enjoin in advance the consummation of any type of M&A (warns) a procedure with which a would-be acquirer has to transaction because the grounds for an injunction generally

15 JAPAN Law & Practice Contributed by Mori Hamada & Matsumoto Authors: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi, Akira Matsushita are limited to a violation of law or the company’s articles of Governance Code provides that, as one of five general prin- incorporation. The general view is that a violation by direc- ciples, listed companies should engage in constructive dia- tors of their duties of care and loyalty is not deemed a “vio- logue with shareholders even outside the general sharehold- lation of law”. The exception is that shareholders may seek ers’ meeting. Additionally, the ownership ratio of shares in injunctive relief against (i) the issuance of stock or stock op- listed companies in Japan by foreign entities has increased tions by the company pursuant to the Companies Act based for three consecutive years. These facts resulted in the growth on certain grounds, including that the issuance is unjust, and of shareholder activism in Japan in 2015. (ii) a short-form merger or exercise of the Squeeze-out Right (under the amended Companies Act) based on the grounds 11.2 Aims of Activists that the consideration is grossly improper. Activists usually focus on, among other things, demands:

10.2 Stage of Deal • to use cash held by a company to pay dividends or repur- Shareholders are more likely to bring legal action in connec- chase shares; tion with M&A transactions involving conflicts of interest, • to appoint outside or independent directors; such as management buyouts or squeeze-out transactions • to remove takeover defence measures; conducted by a controlling shareholder, after the transac- • to spin off certain divisions of a company or other dives- tions are completed. The most common litigation in Japan titures; and is litigation with respect to appraisal rights of shareholders. • to enter into M&A transactions (although there have been Moreover, shareholders sometimes file a suit against direc- few cases where an activist has publicly demanded or en- tors or corporate auditors of the target company for recovery couraged specific M&A transactions). of monetary damages suffered as a result of the violation of their duties of care and loyalty. In 2015, a domestic shareholder activist demanded that a target electronic company convene an extraordinary share- holders’ meeting to elect outside directors nominated by 11. Activism the shareholder activist, but that proposal was voted down. 11.1 Shareholder Activism A large US-based hedge fund urged the target to increase The environment surrounding shareholder activism in Ja- shareholder returns, which prompted the target to pay a pan has been changing over the last few years. For example, large amount of dividends and buy back its shares. Japan’s Stewardship Code was issued on 26 February 2014 by a council of experts established by the FSA. The Steward- With respect to tender offers conducted as the first step of a ship Code provides that institutional investors should fulfil squeeze-out transaction, activists occasionally advocate dur- their “stewardship responsibilities”, which are described as ing the offer period, through a press release or other media, responsibilities to enhance the medium to long-term invest- that the offer price is lower than fair value. However, it is not ment return for their clients and beneficiaries by improving easy for activists to obtain injunctive relief from a court prior and fostering the investee companies’ corporate value and to the completion of the transaction; therefore, they usually sustainable growth through constructive engagement or seek ex-post relief, eg exercise of appraisal rights. purposeful dialogue. Japan’s Corporate Governance Code was also issued on 1 June 2015 by the TSE. The Corporate 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 Mori Hamada & Matsumoto where a transaction proposed at a shareholders’ meeting by Marunouchi Park Building management was not approved as a result of a proxy fight 2-6-1 Marunouchi Chiyoda-ku conducted by a shareholder activist (eg the proposed share Tokyo exchange between Tokyo Kohtetsu and Osaka Steel did not Tokyo-to win approval in 2007). As with squeeze-out transactions, Japan shareholders often seek ex-post relief. 100-8222

Tel: +81 3 5220 1800 11.3 Interference with Completion Fax: +81 3 5220 1700 Activists do not frequently seek or act directly and aggres- Email: [email protected] sively to interfere with the completion of announced trans- Web: www.mhmjapan.com/en actions involving a public company in Japan.

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