M&A Rules in Japan. May 2005 Ministry of Economy, Trade and Industry

Transcription

1 M&A Rules in Japan 1. Structural changes in corporate environment in Japan 2. Negative effects resulting from lack rules on hostile takeovers 3. Global M&A market rules regulations in U.S., EU Japan 4. Fair rules to enhance corporate value (1) Legal issues to consider in adopting Western-style in Japan (2) Stard to judge reasonableness (3) Three conditions to enhance reasonableness gain support from investors 5. Corporate Value Protection Guidelines The Goal 6. Structural regulatory reforms Next Steps May 2005 Ministry Economy, Trade Industry

2 1. Structural changes in corporate environment in Japan During last 10 years, corporate environment in Japan has drastically changed due to dissolution cross-shareholdings increased awareness shareholder value The M&A era is now arriving in Japan with both friendly hostile takeovers [Structural changes in corporate environment in Japan] Dissolution cross-shareholdings Change in awareness shareholder value Change in attitude toward M&A (%) 46% 6% Ratio stock holding Stable, Friendly Stock Holding Ratio 21% Foreign Stock Ownership Ratio 24% Source: Prepared by METI based on data from Research on Cross-Shareholdings in 2003 (NLI Research Institute) FY2004 Share ownership Survey (All domestic stock exchanges) (survey in 1995) 97% managers answered It is stakeholders who own companies (survey in 2005) About 90% managers answered It is shareholders who own companies (survey in 2004) According to a survey employees, 80% answered that y would accept an acquisition which would enhance corporate value, even if by a foreign company Structural changes in corporate environment have increased concerns over hostile takeovers 1

3 2. Negative effects resulting from lack rules on hostile takeovers There is no consensus as to what constitutes a fair fence or defense in hostile takeovers in Japan The situation allows coercive takeover tactics excessive counter-; also results in possible destruction corporate value by companies that have insufficient [Coercive Takeover] Sotoh vs. Steel Partners (SPJ) [Excessive Defense] Nippon Broadcasting vs. Livedoor [Insufficient Defense] [Sotoh Prior to hostile approach] - Manufactured processed textiles - Had no debt approx. JPY20bn liquid assets Spring 2003 SPJ makes friendly proposal to management Sotoh Rejection SPJ s proposal by Sotoh 12/19/03 SPJ launches hostile TOB for Sotoh (fer price: JPY1,150) Partial TOB without any term for back-end fer - NIF, as a white knight, launches a counter TOB for Sotoh - SPJ raises fer price to JPY1,550 NIF withdraws its proposal 2/16/03 Sotoh announces plan to raise its dividend from JPY13 to JPY200 - Its stock price surges to JPY2,000 SPJ s TOB is unsuccessful [Nippon Broadcasting description] - Radio broadcasting - Core business Fujisankei Communication Group 2/8/05 Livedoor acquires more than 30% total shares outsting in Nippon Broadcasting through f-hours trading (surprise attack) (purchase price: JPY6,050) 2/23/05 Nippon Broadcasting announces its issuance new share warrants to Fuji TV (more than 60% would be owned by Fuji TV when exercised) 2/24/05 Livedoor seeks a court injunction in response to plan by Nippon Broadcasting to issue a large number share warrants to Fuji TV 3/23/05 Tokyo High Court upholds a lower court decision blocking Nippon Broadcasting s plan to issue equity warrants to Fuji TV Most Japanese companies have been reluctant to adopt out fears that: - Adoption may not be permissible under Japanese law - Adoption may cause a negative share price reaction Reasons for not adopting (Source: METI, September 2004) Unsure if y are effective (16%) Or (20%) Unsure if y are permissible under Japanese law (31%) Concerns over market s reaction (33%) e.g., rights plan may violate principle shareholder equality Lack precedent Reaction especially from foreign investors Substantial dividend boost was only option but did not result in enhanced corporate value Excessive defenses could be judged illegal Vulnerable to coercive takeovers which could result in destruction corporate value It is necessary to establish fair reasonable rules on hostile takeovers in Japan. The rules should stop coercive takeovers while allowing takeovers that enhance corporate value. 2

4 3. Global M&A market rules regulations in U.S., EU Japan The U.S. (Since 80 s) During M&A boom in U.S. in 80 s, hostile takeovers also increased. Surprise attacks, ten accompanied by accumulation large blocks coercive tactics, such as two-tiered fers, resulted in forced rapid sales companies under circumstances unlikely to achieve maximum results for shareholders In response, companies ten pursued excessive defenses, although se were usually invalidated by judicial action The rights plan prevailed as most effective means providing time to management to pursue alternatives leverage to negotiate a better deal, while leaving ultimate outcome in shareholders' hs because y could replace board The M&A framework in U.S. today provides a fair balance between conflicting interests in takeover situations, with shareholders generally retaining final control over wher a company is sold. Hostile bids continue to be made, are ten successful, but acquisitions occur at a more rational pace with more alternatives available The EU (Since 90 s) Since integration market in 90 s, EU began process establishing common rules for hostile takeovers In parallel with anor M&A boom in U.S., creation Euro led to an M&A boom in EU including hostile takeovers The Takeover Directive, including matory fer rule, was adopted in However, each county has flexibility regarding rules on EU has established rules on hostile takeovers during last 10 years There are three types in EU; UK (frustrating action prohibited in principle), Germany (possible through supervisory board approval), Or Continental Europe (golden share super voting stock) Worldwide M&A market trend Japan (Since 2000) Since late 90 s, friendly M&A bringing about industrial reorganization has increased Threat hostile takeovers has also increased due to dissolution cross-shareholdings widening gap market capitalization Despite M&A boom, re is lack fair rules on hostile takeovers A lack rules allows coercive takeovers, excessive defenses Source: Nobumichi Hattori, Assistant pressor, Graduate school international corporate strategy, Hitotsubashi University 3

5 [Comparison legal framework] While While legal legal approach approach may may vary, vary, all all countries countries have have ways ways to to address address coercive coercive or or abusive abusive hostile hostile takeovers takeovers - - Broadly Broadly speaking, speaking, re re are are two two types types : : (1) (1) Statute-based Statute-based defense defense (e.g., (e.g., matory matory fer fer rule, rule, business business combination combination statute) statute) (2) (2) Company-created Company-created defense defense (e.g., (e.g., rights rights plan, plan, staggered staggered board) board) Japan Japan is is only only country country without without any any protection protection Statute-Based Defense Company-Created Defense U.K. (Matory Offer Rule) Prohibited in principle Germany (Matory Offer Rule) Approval supervisory board required Percentage companies adopting One Share-One Vote in Europe Germany Conti. Europe (France, etc.) (Matory Offer Rule) Golden shares, dual class capitalization UK Italy Average Switzerl Spain France EU U.S. (Matory Offer Rule) (State Statutes) Business Combination Statutes: 33 states Fair Price Statutes: 27 states Control Share Acquisition Statutes: 27 states Constituency Statues: 33 states Prohibited in principle plan, staggered boards Sweden Nerls 100% 80% 60% 40% 20% 0% Percentage companies adopting s (by market cap) 6% 1/16) 44% 11/25) 46% (88/192) 63% 76/120) 69% 93/135) 10tn 50bn 10bn 5bn 1bn METI : SharkRepellent.net data from Nomura Securities (US$) Japan (no matory fer rule no State Statutes) Problem1=coercive attacks are possible Problem2=excessive defenses are possible? 4

6 4Fair reasonable rules to enhance corporate value key key factors factors in in establishing establishing reasonable reasonable Legal issues to consider in adopting Western-style It is possible to adopt Western-style under existing legal framework It is necessary to establish proper rules Rule 1 = Disclose rule Corporate Law / Tokyo Stock Exchange (TSE) rule Rule 2 = Limitation on use excessive METI MOJ s Guideline / TSE s Listed Company rule Stard to judge reasonableness Reasonableness should be judged based on Corporate Value Stard The Corporate Value Stard to be modeled after U.S. stards (e.g., Unocal, Revlon) Companies may consider three different approaches to enhance reasonableness Adopt disclose before an actual hostile approach Proxy out no staggered board To avoid entrenching management in face an actual hostile takeover 1. Independent outside directors/ auditors oversight 2. Qualified fer exemption ( Chewable pill ) 3. Shareholder approval - METI MOJ s Guideline - TSE s Listed Company rule

7 (1) Legal issues to consider in adopting Western-style in Japan 6 Western-style Western-style are are already already permissible permissible under under existing existing legal legal framework. framework. Also, Also, with with new new Corporate Corporate Law, Law, options options for for will will be be broadened broadened However, However, disclosure disclosure rules rules in in Japan Japan are are not not yet yet properly properly established. established. As As disclosure disclosure relevant relevant will will provide provide a a basis basis for for shareholders shareholders investors investors or or acquirors acquirors to to make make appropriate appropriate investment investment decisions, decisions, proper proper rules rules must must be be established established as as soon soon as as possible possible Legal framework Establishment proper rules 1. Defensive are permissible under existing Commercial Code Japan plan can be adopted utilizing Shinkabu Yoyakuken (warrants to subscribe for new shares) Golden shares can be introduced, utilizing different classes stocks Super voting stock can be introduced, utilizing different classes stocks 2. Options for will be broadened with introduction new Corporate Law However, proper rules must be established to avoid misuse 1. Disclosure rules Disclosure obligation in regulatory filings (Corporate Law requirement) METI/ MOJ to establish rules in May Establishment TSE disclosure rule TSE issued guideline in April will establish rule before this year end 2. Limitation on use excessive Establish Guideline METI/ MOJ May Establishment TSE Listed Company rule TSE issued guideline in April will establish rule before this year end

8 (2) Stard to judge reasonableness 7 Reasonableness should be judged based on Corporate Value Stard The Corporate Value Stard to be modeled after U.S. stards (e.g. Unocal, Revlon) Judge by degree threat to corporate value proportionality measure 1. There exists a threat hostile takeover that may result in destruction corporate value Greenmailer; two-step, front-end loaded fer Offer which allows little time for management to seek a white knight or to develop a st-alone counter proposal Offer without adequate disclosure in which shareholders may tender due to incorrect understing or insufficient information 2. The measure is not excessive but instead proportionate to threat Does not treat specific shareholders favorably Does not deprive shareholders right to choose 3. The decision to adopt is taken by Board on an independent informed basis Wher or not sufficient time is spent by Board in discussing analyzing acquisition proposal Wher or not Board has obtained advice outside pressionals (such as investment banks lawyers) Wher or not outside directors or auditors were actively involved

9 (3) Three conditions to enhance reasonableness to obtain support from investors Adoption [Step 1] Adopt before an actual hostile approach with full disclosure May be adopted in conjunction with shareholder value enhancement or corporate governance improvement Basic Structure Features to enhance reasonableness s [Step 2] Proxy out no staggered boards Ensure possible cancellation measure if acquiror takes control board directors through a proxy fight [Step 3] Up to 2 year proxy contest in U.S. (3 year term, staggered boards, removal restrictions) (Example third party check) Independent outside directors (outside auditors) to take part in decision for cancellation or continuation based on analysis advice third party experts (bankers lawyers) (Example qualified fer) 1. Offer in which acquiror provides sufficient information to shareholders gives management enough time to propose alternative plan 2. Offer in which acquiror makes an all cash fer for all shares, price is determined to be fair adequate Up to 1 year proxy contest in Japan (1-2 year term, no staggered boards, no removal restrictions) Add features to enhance transparency avoid management entrenchment Adoption through board resolution Adoption through board resolution Adoption through shareholder approval Independent outside directors auditors to judge wher to maintain or cancel in takeover contexts Automatically terminate in event a qualified fer [Chewable pill] Obtain shareholder approval on adoption as well as application in takeover contexts (Example shareholder approval) In takeover contexts, determine wher to cancel based on stard (such as judgment stard, process) provided for in Articles Incorporation approved by shareholders U.S. Mainstream U.S. Variations Preferred by Institutional Investors 8

10 Fair starting point for in Japan Start with a reasonable plan acceptable to investors] Dead-H Dead-H + + Staggered Staggered Board Board Basic Basic Chewable Chewable w/ Shareholder w/ Shareholder Approval Approval Condition Condition 1 1 Disclosure Disclosure Requirements Requirements Condition Condition 2 2 Basic Basic Requirements Requirements (Maximum years required for control) (NA) (2) (2) (1) (2) (1) (1) Condition Condition 3 3 Additional Additional Requirements Requirements Independent outsiders check Chewable pill Shareholder approval 9

11 5. Corporate Value Protection Guidelines The Goal 10 Properly Properly understood understood respected respected Corporate Corporate Value Value Protection Protection Guidelines Guidelines will will accelerate accelerate furr furr development development Japanese Japanese M&A M&A market market in in line line with with global global stards stards Accumulation cases Judicial Judicial Corporate Corporate Value Value Protection Protection Guidelines Guidelines Fair defense Excessive defense (METI (METI / / MOJ) MOJ) Administration Administration Possible revision M&A rules Fair disclosure/ limitation on use excessive defense Stock Stock exchange exchange Board/ Board/ Management Management Adoption Institutional Institutional investors investors Pressionals Pressionals such such as as lawyers lawyers bankers bankers Advice based on guidelines Independent outsiders check Chewable pill Shareholder approval Establishment voting guidelines Accelerate shift to more independent boards Establish stards to properly investigate acquisition proposals Emphasize importance shareholder value facilitate dialogue with shareholders

12 6. Structural regulatory reforms Next steps 11 Step Step 1 1 Permit Permit reasonable reasonable while while preventing preventing excessive excessive defenses defenses 1. Disclosure rules 2. Limitation on use excessive Disclosure obligation in regulatory filings (Corporate Law requirement) METI/ MOJ May Establishment TSE disclosure rule TSE issued guideline in April will establish rule before this year end Establish Corporate Value Guideline METI MOJ-May Establishment TSE Listed Company rule TSE issued guideline in April will establish rule before this year end Established in May Step Step 2 2 Additional Additional reviews reviews possible possible revisions revisions (main (main point point LDP LDP Study Study Group) Group) 1. Should Japan adopt matory fer rule? (similar to EU/ UK) 2. Should Japan adopt business combination statute? (similar to Delaware 203) Conclusion in June or July