Corporate takeovers—hostile or otherwise—remain a rarity in Japan and will continue to be so unless certain changes in corporate governance take place. Leading experts in the field of mergers of acquisitions, both in the U.S. and Japan markets, gathered at the Roppongi Hills Club for an ACCJ panel discussion on June 17th themed “Will we see a market for corporate control in Japan in our lifetime?” to share their views on whether these changes have more to do with the structure of corporate law, or Japan’s corporate culture itself.
Laying the foundation for the discussion, Stephen Givens—formerly managing partner of the Tokyo office of law firm Gibson, Dunn & Crutcher—outlined the two types of merger and acquisition deals usually seen in Japan: Those by abusive acquirers and tender offers by established businesses for strategic regions.
Givens cited Internet service company Livedoor’s bid for Nippon Broadcasting System (NBS) in 2005 and U.S.-based hedge fund Steel Partners’ bid for Bull-Dog Sauce in 2007 as two main hostile takeover bids to have taken place in Japan over the past decade. An example of an acquisition bid for strategic purposes was Oji paper’s bid for Hokuetsu Paper Mills Ltd in 2006, where Oji intended to commence a tender offer of 860 yen per share, or at a 34 percent premium.
“All these bids ended in failure not because Japanese law is hostile to hostile bids, but because shareholders didn’t want the bids to go through,” said Givens, a veteran U.S. corporate lawyer with extensive experience in cross-border mergers and acquisitions involving Japanese companies.
“Shareholders in Japan aren’t motivated by takeover premiums, but by their relationship with the target,” he said.
Indeed, Japanese companies fall short of their European and U.S. counterparts in performance indicators such as return on equity. Analysts often point to lax corporate governance standards that entrench management as the root cause.
Bull-Dog Sauce Co., a Japanese sauce and seasoning company, exercised Japan’s first poison pill defense—or measures taken to thwart takeover bids—to dilute the stake of Steel Partners by issuing three equity warrants for each Bull-Dog Sauce share to existing shareholders except Steel Partners. Steel Partners had launched the unsolicited bid for Bull-Dog Sauce on the premise of maximizing company performance and enhancing shareholder value. Yet, over 80 percent of Bull-Dog Sauce’s shareholders voted in favor of the company’s takeover defense measure, and the Tokyo High Court declared that Bull-Dog Sauce’s move did not run counter to the principle of shareholder equality.
Despite the perception that Japan is moving closer to Delaware General Corporation Law, known to be pro business development and for its extensive records of case studies, Givens pointed to the outcome of the Bull-Dog Sauce case to show that corporate Japan has yet to fully endorse the spirit of Delaware takeover law.
In the United States, the courts took the lead in answering questions raised by hostile M&A activity, such as who should have the power to determine whether an unsolicited bid should be put to shareholders. Market players then adapted to the rules developed by the courts. In this way, the United States reached a working equilibrium as to how the poison pill system operates.
At the other end of the spectrum, and speaking from a Delaware perspective, Justice Jack B. Jacobs of the Delaware Supreme Court noted that it is as yet unclear whether or not U.S. shareholders will be become either the beneficiaries or victims of recent amendments to the Delaware General Corporation Law, such as regulations aimed at increasing and ensuring the independence of board directors through stricter requirements of disinterest. These bylaws will allow companies to impose more restrictive procedures for nominating directors than will be imposed under federal law.
“This is restricting the number of directors qualified to sit on company boards, and may result in fewer board directors who actually know anything about the business of the company. By right, directors should bring value to a company, not just judge what is right or wrong,” said Justice Jacobs.