On 31st August 2023, Japan’s Ministry of Economy, Trade and Industry (“METI”) released its Guidelines for Corporate Takeovers -Enhancing Corporate Value and Securing Shareholders’ Interests- (“the Guidelines”).
The number and value of M&A transactions in Japan are said to have been increasing in recent years. More and more foreign companies are considering acquiring Japanese companies. It is important for the acquirers to understand the Japanese rules in order to ensure that the acquisition takes place correctly.
In the following, we will refer to those issues contained in the Guidelines that may be useful for acquiring companies. In addition, we will refer to the period of time which may be granted to the entity whose shares are to be acquired in order to consider the acquisition proposal in order to consider the proposed acquisition, as well as to the prevention of acts that affect shareholder decision-making.
I. Scope and binding power of the Guidelines
The Guidelines primarily address transactions in which an acquiring company acquires corporate control of a listed company by acquiring its shares.
Unlike laws and regulations, the Guidelines are not binding on any party. However, they are referred to by directors, lawyers, judges, and other practitioners involved in corporate M&A, and they are naturally a standard to be referred to in the event of a legal dispute.
II. Principles of the Guidelines
According to the Guidelines, there are three principles, that should be respected in acquisitions of the management control of listed companies:
(1) Principle of Corporate Value and Shareholders’ Common Interests,
(2) Principle of Shareholders’ Intent, and
(3) Principle of Transparency. In the Guidelines, these three principles are used to explain the policies for each party in a corporate takeover.
III. Code of Conduct regarding Acquisition Proposals
Upon receipt of an acquisition proposal to acquire corporate control of the corresponding company, the recipient company should promptly submit or report such matter to the board of directors.
Whether an acquisition proposal should be submitted to the board of directors shall be judged objectively and follow the established procedure. In this regard, the Guidelines state that it should:
– Be in written form rather than oral form
– Identify the acquiring party rather than maintain anonymity
– Include the purchase price and timing of the acquisition
– Specify the terms and conditions of the acquisition proposal
– Demonstrate the credibility of the acquiring party, for example its track record as an acquiring party and its financial strength.
Therefore, the acquiring party should also make an acquisition proposal that meets the above factors.
In addition, the Guidelines establish what are the indicators for determining that an acquisition proposal does not constitute a “bona fide offer”:
(a) When the acquisition proposal does not specify the details of the purchase price and key transaction terms.
(b) When the acquisition proposal does not indicate the management strategy after acquiring corporate control.
(c) When the acquisition proposal is made for the purpose of raising the purchase price of other parties, in situations where there are other competing bidders.
(d) When acquisition proposal is made by competitors for a purpose such as gaining confidential information.
(e) When acquisition proposal without appropriate financing to carry out the acquisition transaction.
(f) When acquisition proposal is objectively unlikely to succeed due to the low probability of satisfying the conditions for acquisition, such as regulatory permits and approvals.
(g) When acquisition proposal aims to obtain controlling interest in situations where the controlling shareholder is known to have no intent of selling its controlling shares to a third party.
Following the Guidelines, it is expected that the board of directors of the acquired company, when considering the proposal received “bona fide” (in terms of the Guidelines: “sincere manner”), obtain additional information from the acquiring party about the acquisition proposal, and should consider the appropriateness of the acquisition from the perspective of whether the acquisition will contribute to enhancing corporate value of the companies, with a focus on the post-acquisition management strategy, the appropriateness of the purchase price and other transaction terms, the acquiring party’s financial resources, track record and management capabilities, and the feasibility of successful completion of the acquisition.
IV. Acquisition of Shares and Disclosure of Information by an Acquiring Party
According to the Cabinet Office Ordinance on Disclosure of the Status of Large Volume Holding of Share Certificates, etc., any person who holds more than 5% of the share certificates, etc. of a listed company must submit a Large-Scale Shareholding Report. This report will contain information on the large volume holders and the acquisition of share certificates and other securities.
In addition, the Financial Instruments and Exchange Act establishes a take-over bid system under which the obligation to make a tender offer accompanied by disclosure of information on the purpose of the purchase, management policies, etc. arises when a company acquires the shares, etc. of a listed company, etc. under certain conditions, as followings:
- purchases from 11 or more persons within a 60-day period, when the ownership ratio after the purchase exceeds 5%, or
- purchases from 10 or fewer persons within a 60-day period when the ownership ratio after the purchase exceeds one-third.
The Guidelines state that the provision of information through these schemes contributes to the informed judgment of shareholders.
And the Guidelines also state that, in the case of an open-market purchase, and in a situation where an acquirer attempts to acquire corporate control in a short period of time through open-market purchase, it is advisable for the acquirer to provide at least the same level of appropriate information to the capital markets and the target company as in the tender offer registration statement in a timely manner and an appropriate form, such as the purpose of the purchase, the number of shares to be purchased, summary of the acquiring party, and the basic management strategy after the acquisition, so that shareholders can decide whether to accept the acquisition proposal after understanding the impact of the acquisition on the company’s corporate value.
V. Toehold and Intent of Acquisition
When considering an acquisition of a company, an acquiring party sometimes obtains a small participation in the capital of the target company through a pre-acquisition purchase (toehold) in order to gain an understanding of the company’s status, and then decides whether to proceed with an acquisition proposal.
The Guidelines recognize the significance of the pre-acquisition (toehold) in advancing acquisition of a successful tender offer to make an acquisition.
On the other hand, the Guidelines point out the possibility that shareholders may sell their shares at a lower price that does not reflect a control premium (a premium paid for a shareholding that provides the majority of voting rights in the governing bodies of a company). if the party has a clear intent of acquisition but advances to buy shares without revealing this intention.
So, the Guidelines state that it is advisable for a company intending to make an acquisition in Japan, if the party is definite about its intention to make a subsequent tender offer, to provide information to the capital markets and the target company when advancing to purchase the company’s shares in the market prior to its tender offer.
Satoshi Minami
Vilá Abogados
For more information, please contact:
6th October 2023
