I. Introduction
In Japan, recent years have seen an increase in public M&A deals involving competing proposals.Such cases raise complex issues that the board of the target company must consider and deal with. In addition, a number of judicial decisions have been handed down in 2021 and 2022 on injunctions against countermeasures based on takeover response policies adopted by listed companies in the face of unsolicited acquirers. These facts form the background of the Fair Acquisition Study Group (the “Study Group”) launched by the Ministry of Economy, Trade and Industry (“METI”) in November 2022, with the aim of improving predictability and presenting best practices for parties involved in acquisitions, and affected capital market participants.
The Study Group examined parties’ actions and reactions in unsolicited takeover proposals (both the perspective of the target company’s board of directors and the acquirers) to determine best practices for anti-takeover measures. Based on the Study Group discussions and reflecting public comments, METI formulated and published the “Guidelines for Corporate Takeovers” (the “Guidelines”) on August 31, 2023.
II. Characteristics and Overview of the Guidelines
While the Guidelines do not have any statutory effect, they are expected to have a significant impact on Japanese M&A practice, as was the case with both the Fair M&A Guidelines published in 2019 and the “Guidelines Regarding Takeover Defense for the Purposes of Protection and Enhancement of Corporate Value and Shareholders’ Common Interests” published in 2005 (the “2005 Guidelines”). In fact, close analysis of disclosure documents in relation to tender offers launched after the publication of the Fair M&A Guidelines clearly shows the alignment of actual practices with recommended best practices (“Fairness Ensuring Measures”) for transactions involving a structural conflict of interests, including the formation of an independent special committee by the target which comprises outside directors and other independent members.
While the primary focus of the Fair M&A Guidelines is on management buyouts and acquisitions of a controlled company by a controlling shareholder (in each case where a structural conflict of interests exists), the scope of the Guidelines encompasses arms-length acquisition transactions between third parties. It is also noteworthy that Chapter 5 of the Guidelines presents an updated version of the 2005 Guidelines, which addressed takeover response policies and countermeasures, with substantial revisions taking into consideration, among other things, changes in practice following the 2005 Guidelines and above-mentioned court rulings on defense measures in 2021 and 2022.
The Guidelines are comprised of four main chapters: outline of the principles and basic perspectives (Chapter 2), code of conduct for directors and boards regarding takeover proposals (Chapter 3), information disclosures in acquisitions (Chapter 4), and takeover response policies and countermeasures (Chapter 5). Each of these chapters contains a variety of issues related to acquisitions which require careful reading. This article will focus on two such issues: (i) the concept of “corporate value”(discussed in Chapter 2) and (ii) “majority-of-minority” resolution (discussed in Chapter 5).
III. Concept of Corporate Value
The first principle presented by the Guidelines to be taken into consideration in acquisitions is that desirability of an acquisition should be determined on the basis of securing or enhancing corporate value and best interests of the shareholders. In this respect, the 2005 Guidelines stated that the corporate value of a company is enhanced by respecting its relationships with various stakeholders, including employees and business partners. The concept of “corporate value” used by the 2005 Guidelines might have helped several target companies, in the face of unsolicited takeovers, emphasize employee motivation, relationships with business partners and other qualitative factors.
The Guidelines state that corporate value is a quantitative concept: the sum of the present values of discounted future cash flows generated by a company[1]. Further, the Guidelines state that the target company’s management should not make the concept of corporate value unclear by emphasizing qualitative value, which is difficult to measure, nor should the concept of “corporate value” be used as a tool for the management to defend themselves.
Given the concept of corporate value presented by the Guidelines, takeover response policies which designate impairment of relationship with employees and other stakeholders as a countermeasure triggering event (on the ground that such impairment means impairment of corporate value) will likely be subject to counter-arguments supported by the Guidelines.
IV. “Majority of Minority” Resolution
One recent court ruling on takeover response policies and countermeasures is the Tokyo Kikai Seisakusho case. In this case, a resolution at a shareholders’ meeting on the invocation of countermeasures was adopted, which resolution did not count the voting rights of the acquirer, the target company’s directors and their related parties (so-called “majority-of-minority (MoM) resolution[2]”). The court held that the MoM resolution was permitted in that particular case, but it still remains unclear on what grounds and under what circumstances MoM resolutions may be permissible.
The Study Group initially made an attempt to establish certain best practices or guidelines on this issue, but after a series of discussions, the Guidelines settled on the position that there is no clear answer to the issue. Instead, the Guidelines refer to several different opinions raised in the Study Group. Nevertheless, the Guidelines make it clear that the invocation of countermeasures based on an MoM resolution must not be abused, and that any such invocation may be permitted only in very exceptional and limited cases, on the basis of special case-by-case circumstances. This general statement is not directly led by the court ruling on the Tokyo Kikai Seisakusho case, and therefore may have potential impact on relevant practice in the near future.
V. Conclusion
Since only a couple of weeks have passed after the publication of the Guideline, very few public deals have been announced thereafter. As discussed above, however, a variety of changes are expected in public M&A practice in light of the Guidelines. Investors, listed companies and other potential parties to public deals need to pay close attention to upcoming trends and developments in this arena.
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Author: Takahiro Oishi, Partner
Footnotes
[1] The Guidelines make it clear that the value arising from quantifiable increases in future cash flows resulting from the contributions by employees, business partners and other stakeholders should be included in the quantitative concept of corporate value.
[2] The Guidelines do not use the term “majority-of-minority resolution” because shareholders with voting rights (other than interested shareholders) are usually not minorities.