Overview of Tender Offer Bids under Japanese Law

Transcription

1 Overview of Tender Offer Bids under Japanese Law Introduction Tender offers on a recommended basis are common in Japan. Hostile bids are unusual, although in late 2004 / early 2005 there were two attempts at obtaining control against the will of the target management, by Livedoor for NBS and by SMFG for UFJ. As the keiretsu system of crossshareholdings has been significantly weakened over the last decade, many Japanese listed companies have found themselves for the first time feeling vulnerable to hostile takeovers. The Japanese takeover rules do not provide adequate protection from a determined bidder, as we saw in the Livedoor bid where tactics were used which were legal in Japan but would have been prohibited in the US or the UK. Many companies have responded in various ways: by trying to raise their share price by increasing dividends and undertaking sometimes painful restructuring, by installing poison pills (successfully or unsuccessfully), by looking for a white knight bidder or by taking themselves private. The effect of this major change in attitude, mostly within the space of the last nine months, coupled with the greatly increased interest of foreign and domestic private equity funds, has been to focus attention on listed companies as possible M&A targets. Only a very small proportion is likely to end up as victim of a hostile takeover. However, the fear of this, plus some new focus on shareholder value, has made M&A a matter for serious consideration amongst the boards of directors of many Japanese companies. We expect the M&A market to continue to grow, absent some government initiative or other unexpected factor that throws it off course. We expect MBOs, LBOs, private equity (especially domestic) and more innovative financing techniques to become increasing features of the market. This memorandum gives an overview of the key legal considerations when planning a tender offer in Japan. 1 Acquiring a publicly listed company in Japan 1.1 If a bidder ( Bidder ) wishes to acquire the shares in a company listed on an exchange in Japan ( Target ), Bidder must comply with the tender offer rules set out in the Japanese Securities and Exchange Law ( SEL ), which generally require that Bidder acquires the shares by way of an off-market tender offer bid ( TOB ) to all shareholders. TOBs made in accordance with the SEL are regulated by the Financial Services Agency through a competent local finance bureau ( LFB ). 1.2 Off-market acquisitions which would result in Bidder holding more than one-third of the shares in any Japanese listed company must be made under a TOB. A TOB is also required if off-market acquisitions over a period of 60 days are made from more 1

2 than 10 persons and result in a holding of more than 5 per cent. of the shares in Target. 1.3 There are certain exceptions to the requirement to launch a TOB. In particular, the SEL does not require Bidder to launch a TOB where: the shares are acquired on-market (ie, on a stock exchange); for this purpose, transactions effected on a securities market but outside the regular trading hours (eg, transactions effected on ToSTNeT) are now not treated as on-market transactions, since this loophole was closed after being (legally) exploited in the Livedoor bid; or the shares are acquired off-market (ie, outside a stock exchange) and one of the following applies: (i) (ii) (iii) (iv) (v) (vi) the shares acquired, together with shares previously held by Bidder, represent 5 per cent. or less of the issued share capital of Target; following the acquisition, Bidder holds one-third or less of the issued share capital of Target and the number of sellers from whom Bidder has acquired shares within the previous 60 days is 10 or fewer; the shares were acquired through a designated transaction (ie, transactions effected on a securities market but outside the regular trading hours (eg, transactions effected on ToSTNeT)) following which Bidder holds one-third or less of the issued share capital of Target; prior to the acquisition, Bidder held more than 50 per cent. of the issued share capital of Target and the number of sellers from whom it has acquired shares within the previous 60 days is 10 or fewer; Bidder subscribes for newly issued shares in Target (ie, through a capital increase); or the sale is a transaction between specially related parties (ie, two parties, one of which has held 20 per cent. or more of the shares of the other for at least 1 year). 1.4 The philosophy of these exemptions is that, for a shareholder to move from negative control (one-third of the voting shares, above which it can block a merger or other super-majority vote) to positive control (more than 50 per cent. of the voting shares, with which it can appoint directors and pass other ordinary resolutions) by purchasing existing shares from a selling shareholder(s), the purchaser should either make a TOB or buy the shares on-market, either of which method theoretically gives the other shareholders some ability to participate in any premium offered to the selling shareholder(s). However the takeover rules do not always achieve this aim in practice, as the Livedoor bid showed, where the minority shareholders were effectively excluded from participating due to the way the takeover bid was (legally at the time) structured. 2

3 2 Public announcement of TOB 2.1 Bidder is required to announce the proposed TOB to the public by publishing a public notice in two daily newspapers. The public notice must include certain information including: the purpose of the TOB; the number of shares to be purchased and the purchase price; the TOB period; the names of the TOB agent(s) ie, a financial institution appointed by Bidder to handle receipt of all payments, custody of shares, etc; the method of acceptance of the TOB and the date of commencement of settlement of the TOB; any other conditions of purchase (eg, any minimum share condition often per cent. or 90 per cent.); whether or not there has been any agreement with Target or its officers concerning the TOB (including whether or not Target will support the TOB); and the purpose, business and paid-in capital of Bidder. 2.2 At the same time that the public notice is published, Bidder must file a Tender Offer Registration Statement ( TORS ) with the LFB (through the electronic EDINET system) and send a copy of the TORS to Target and to the stock exchanges on which Target s shares are listed. In summary, the TORS contains the information set out in the public notice, together with additional information about Bidder and Target. The TORS should also include any material information known to Bidder (ie, information which an investor would reasonably need to know). A version of the TORS, a Tender Offer Explanatory Statement, is sent to every Target shareholder which indicates a willingness to sell its shares in response to the TOB. 2.3 Bidder may only withdraw the TOB if a condition to that effect has been included in the TORS and in the public notice. Only certain conditions allowing withdrawal are permitted. Material adverse change is not generally in itself a reason to withdraw. Bidder may waive a condition giving rise to a right to withdraw if an event triggering the condition occurs. 3 TOB terms 3.1 TOB period The TOB period must be not less than 20 calendar days and not more than 60 calendar days from the day on which the public notice of the commencement of the TOB is made. The 20 calendar day period is generally construed to start on the day after the formal launch of the TOB but it does include the closing day (so that the inclusive number of days on which the TOB is open would be 21) If a competing TOB commences, the TOB period can be extended until the close of the competing TOB. 3

4 3.1.3 Bidder may not close the TOB before 20 calendar days have elapsed, even if more than the maximum number of shares to be purchased in the TOB have been tendered. Where the TOB period set out in the public notice and the TORS is longer than 20 days, Bidder may not close the TOB before that period has elapsed, even if more than the maximum number of shares to be purchased in the TOB have been tendered. 3.2 Uniform conditions The terms and conditions, including the purchase price, on which a TOB is made must be uniform for all Target shareholders. If Bidder gives shareholders the option to select cash or securities as consideration, the options must be available on uniform terms to all Target shareholders. 3.3 The number of shares In principle, Bidder is obliged to purchase all the shares tendered in the TOB. However, Bidder may control the number of the shares to be purchased in the TOB as follows: (i) (ii) by setting a minimum number of shares to which the TOB relates, so that, for example, if the total number of shares tendered is less than a specified number, the offer will be withdrawn and no purchases will be made; and/or by setting a maximum number of shares to be acquired, so that, for example, if the number of shares tendered exceeds a specified number, Bidder will only purchase such specified number, divided on a pro-rata basis among all the shareholders who have tendered their shares in the TOB (in which case, a shareholder that has tendered shares will be unable to sell all of the shares it has tendered). By including both conditions (i) and (ii) above in the TOB, Bidder may commit to purchase no more and no less than a specified number of shares. This could be used for example to ensure that a successful bid would reach a control threshold, but with an upper limit to reduce financing costs Bidder will not be required to purchase (and has no right to purchase) shares not tendered in the TOB. In other words, there is no obligation to purchase shares from minority shareholders after the TOB closes. Correspondingly, there is no statutory method of squeezing out minority shareholders, although there are non-statutory methods (see paragraph 5 below). 3.4 Consideration There are no restrictions on how the purchase price is determined. Accordingly, the TOB price may be less than the market price. Although this may seem unusual, this is not at all uncommon in Japan. No shareholder has a legal right to demand an increase of the TOB price. TOBs are sometimes conducted at less than market price where a particular shareholder wishes to sell a large stake and can agree a price with the 4

5 potential buyer. The buyer will make a TOB at the low price and include as a condition a maximum number of shares to be purchased which may be equal to (or possibly slightly more than) the number of shares to be sold by the relevant shareholder. If other shareholders decide to accept the TOB notwithstanding that it is below market price, then the selling shareholder may be scaled back It is possible for Bidder to make all or part of the payment in shares of Bidder (ie, an exchange of shares). The TORS must indicate that shares will be the consideration and a securities registration statement for the shares must be filed. In practice, foreign bidders invariably make cash bids, although it is possible that we will start to see cross-border share for share bids when the law changes in 2007 (see paragraph below). 3.5 Bidder may modify the TOB terms during the offer period provided: (a) the modification does not disadvantage Target s shareholders (eg, reduction in price, decrease in number of shares to be acquired); and (b) Target shareholders who have already accepted benefit from the modification. If a change is made to the TOB terms, then Bidder must file an amendment to the TORS and issue a public notice. This may necessitate an extension of the TOB period since there must be a period of at least 10 days between the date of filing of an amendment and the last day of the TOB period. 4 Irrevocable undertakings regarding Target shares 4.1 The SEL does not prohibit Bidder from seeking undertakings to tender shares from potential sellers of shares in a TOB. Generally, however, such undertakings are not enforceable due to the right of a seller to withdraw at any time until the close of the TOB. Any waiver by a seller of its right to terminate such a commitment or to withdraw its acceptance is likely to be construed as invalid. Notwithstanding this, undertakings are sometimes taken in practice, imposing at least a moral commitment on the party giving the undertaking. 4.2 Disclosure is required in the TORS where there is an agreement or arrangement (written or oral) to acquire shares eg, an irrevocable undertaking or a memorandum of understanding. 5 Compulsory acquisitions and minority squeeze outs 5.1 There are no statutory mechanisms under Japanese law designed to squeeze out minority shareholders in a Japanese company following a TOB. The usual methods to reduce further the holdings of minority shareholders are: (a) to conduct a subsequent TOB (or series of TOBs), (b) to buy shares off-market in circumstances where a tender offer is not required (eg, purchasing from up to 10 shareholders in a 60 day period) or (c) to make on-market purchases of shares. Once Bidder has a sufficiently large shareholding to justify implementing the de facto squeeze out, it may follow one of the de facto squeeze out routes below. The previous TOB(s) would provide a guideline price at which the squeeze out should be conducted, on the argument that since the TOB had been successful, this would be an indication to a court, if challenged, that the squeeze out price was fair. In this regard, a squeeze out should generally take place not too long, say 6 months, after a TOB to establish a sufficient linkage in terms of price. 5

6 5.2 There are several legal devices to achieve a de facto squeeze out of minority shareholders. However, as these have never been tested in court, these are open to possible shareholder challenge as an abuse of the majority shareholder s rights. In practice, several de facto squeeze-outs have occurred without challenge where Bidder has first acquired 90 per cent. of Target. 5.3 Corporate liquidation (via a Kabushiki Iten) Bidder can remove minority shareholders from a listed Target if it carries out a share transfer to create a new intermediate holding company which will own 100 per cent. of Target. The minority shareholders will then be shareholders in the intermediate holding company. The intermediate holding company then sells Target for cash to Bidder or an affiliate of Bidder. The new holding company is then liquidated and its cash distributed pro rata to shareholders As a share transfer can be implemented by a special resolution, it is technically possible for a two-thirds majority shareholder to squeeze out minority shareholders using this method. However, if such resolutions are passed by the majority shareholder for the purpose of squeezing out the minority shareholders, this may be deemed to be an abuse by the majority and therefore subject to an action to set aside the transaction by the minority shareholders. It is generally thought that a successful TOB which has led to a holding of more than 90 per cent. is sufficient indication that the majority shareholder has not abused the rights of the minority. This has not yet been approved by the courts and so continues to carry some risk, although this method has been used (without court challenge) several times in Japan over the past few years As this method involves the sale of shares, and so potentially generates a taxable gain in the intermediate holding company, it is possible that adverse tax issues will arise if the method is implemented. This will depend very much on the facts of the case. 5.4 Share for share exchange (via a Kabushiki Kokan) Where Bidder is a Japanese company, it can implement a share exchange to obtain 100 per cent. of Target. However, this requires it to issue shares in itself to the shareholders of Target. Under this method, Target minority shareholders would become minority shareholders in Bidder In order for Bidder to avoid having Target s minority shareholders becoming shareholders of Bidder, Bidder could use a Japanese intermediate company whose shares would be exchanged for the shares of Target. Under this structure, Target s minority shareholders would then become minority shareholders of the Japanese intermediate company. If this alternative structure is used, then Bidder need not be a Japanese company. However, this may not be attractive to the Target shareholders A share exchange can be implemented by a special resolution and therefore it is technically possible for a two-thirds majority shareholder to squeeze out minority shareholders using this method. The same 6

7 considerations apply as in the corporate liquidation route (see paragraph above) Under the Industrial Revitalisation Law, it is possible for a non-japanese company to use its own shares as consideration in the share exchange through a triangular merger in which a Japanese subsidiary of a foreign bidder enters into a share exchange or merger with the target Japanese company using the shares in the foreign bidder as consideration for the share exchange or merger. However, this requires a business improvement plan to be produced which requires specific regulatory approval Notwithstanding the above, the new Company Law, which for this purpose will come into effect around May 2007, will allow a non-japanese company to use its own shares as consideration in the share exchange in the same manner as under the Industrial Revitalisation Law but without any requirement for a business improvement plan or regulatory approval. The Japanese tax office has not yet announced whether it will allow a tax rollover for selling shareholders in this situation: this will be a significant factor in whether this route becomes widely used. 5.5 Cash-out merger Under the Industrial Revitalisation Law, a cash-out merger is also possible. This involves Target merging into Bidder. Instead of receiving shares in the merged entity (as would normally be the case), the shareholders of Target, which dissolves and disappears, can be paid in cash. However, this requires a business improvement plan to be produced which requires specific regulatory approval Notwithstanding the above, the new Company Law will allow a cash-out merger in the same way as a normal merger. However, a foreign bidder will still need to use a Japanese subsidiary into which Target is merged. 5.6 Asset transfer If commercially justified and subject to directors fiduciary duties, a de facto squeeze out of minority shareholders could also be effected by transferring the business of Target to another company, thereby leaving Target s shareholders with a company stripped of its assets. 6 "Control" over Target 6.1 Japanese companies are managed through corporate resolutions of the board of directors. Therefore to ensure day-to-day control of Target, Bidder would have to acquire a sufficient number of shares to appoint and remove directors. More than 50 per cent. of the voting shares would enable Bidder to appoint directors, provided the maximum number of directors permitted by the Articles of Incorporation were not already appointed. However, under the current law, Bidder would require two-thirds or more of the voting shares to remove directors (this will be changed to more than 50 per cent. when the new Company Law comes into effect next year, although the Articles of Incorporation of Target may state that a higher threshold is needed). 6.2 Two-thirds or more of the voting shares would also enable Bidder, among other things, to change the Articles of Incorporation, approve mergers and share 7

8 7 Financing issues exchanges, transfer all or a major part of the business, dissolve Target and pass certain other resolutions requiring a super-majority. 7.1 There are some key differences when providing acquisition finance in Japan compared to the UK or US. These include the following: Financial assistance is not prohibited in Japan, so Target can provide direct security. This requires the agreement of Target s board of directors, who must be satisfied that it is in Target s best interests We have also seen Target itself being borrower in Japan which avoids the lenders being structurally subordinated The financing banks will normally want to merge Bidder and Target quickly, not least to improve their security position. For this reason, financing banks will generally insist on a minimum acceptance condition of two-thirds or more of the voting shares in the TOB. If exceptionally they do accept a lower condition such as more than 50 per cent., they will usually require a higher interest rate Dividend distribution is currently limited to twice per year, which is a further reason to merge Bidder with Target to enable more regular interest payments to be made. However, this problem will be relieved by the new Company Law which will permit unlimited dividend distributions, subject to availability of distributable profits Financing hostile takeovers faces severe risk of criticism as was seen in the Livedoor/NBS bid. 7.2 Notwithstanding recent changes to Japanese bankruptcy law, subordination rights as between senior and other lenders are not necessarily effective in every case. While there are partial solutions, they are not perfect. This is a complex area outside the scope of this memorandum. A related issue is that there is not as yet a welldeveloped mezzanine market in Japan. Nor is there a second lien market. Despite this, it is possible to syndicate the finance for a large LBO, as we saw on the US$2.2 billion acquisition of Japan Telecom by Ripplewood which included 11 foreign and domestic MLAs. * * * If you would like further information please contact: Casper Lawson, Partner, casper.lawson@linklaters.com, Hideo Norikoshi, Partner, hideo.norikoshi@linklaters.com, Hidehiro Utsumi, Partner, hidehiro.utsumi@linklaters.com, Yasuto Hashinaga, Consultant, yasuto.hashinaga@linklaters.com, Steven Tran, Managing associate, steven.tran@linklaters.com,

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