Japan Squeeze-out Guide IBA Corporate and M&A Law Committee 2010

Transcription

1 Japan Squeeze-out Guide IBA Corporate and M&A Law Committee 2010 Contact Ryutaro Nakayama Nishimura & Asahi

2 Contents Page INTRODUCTION: OVERVIEW OF SQUEEZE-OUTS IN JAPAN 2 THE SQUEEZE-OUT PROCESS 2 POTENTIAL CHALLENGES BY MINORITY SHAREHOLDERS 7 CONCLUSION 8 Page 1

3 INTRODUCTION: OVERVIEW OF SQUEEZE-OUTS IN JAPAN A transaction which is aimed to squeeze out minority shareholders in exchange for cash (hereinafter, a Squeeze-Out ) is a relatively novel legal scheme in Japan. While there had been virtually no Squeeze-Outs prior to 2000, Squeeze-Outs have gradually increased thereafter and reached almost 100 per year just before the financial crisis in Squeeze-Outs are typically used when an investment fund intends to acquire all the shares of the company (buyout), or a parent company intends to make a listed company a wholly-owned subsidiary. In particular, a buyout initiated by the company s management or MBO is the most popular application of a Squeeze-Out. The fact that Squeeze-Outs have been well recognized in Japan does not necessarily mean that they have become off-the-shelf transactions. Rather, as will be mentioned in more detail below, a number of legal issues are associated with complicated multi-step transactions; the relevant rules leave much ambiguity, and hostile activities by dissenting shareholders have led to court decisions unfavorable to the acquirer and/or the company. In short, while a Squeeze-Out is a valid tool for a foreign acquirer to obtain complete control over an existing Japanese company with diverse minority shareholders, one should use sufficient care in order to comply with various procedural requirements and to prepare for the defenses against possible challenges by dissenting shareholders. The process of a Squeeze-Out is mainly governed by the Companies Act (kaisha-ho) and the Financial Instruments and Exchange Law of Japan (kinyu shohin torihiki-ho) (hereinafter, the FIEL ). The Financial Services Agency (hereinafter, the FSA ) has published its interpretations on some issues relating to the Squeeze-Out process in the form of answers to frequently asked questions, which is important from a practical point of view. When the transaction is categorized as an MBO, in which any of the management of the target company is to hold stakes in the target after the Squeeze- Out, some court decisions refer to the Guidelines on Increasing Corporate Value and Ensuring Regulatory Compliance in the Context of Management Buyouts (MBOs) (hereinafter, the MBO Guidelines ) issued by the Ministry of Economy, Trade and Industry as a benchmark on the fairness of the transaction. In this regard, it is prudent to consider additional requirements as indicated in the MBO Guidelines if the transaction is categorized as an MBO. THE SQUEEZE-OUT PROCESS A Squeeze-Out is typically composed of two steps. The first step is a tender offer for the shares of the company (hereinafter, TOB ). The second step is a combination of corporate actions which is specifically designed to squeeze-out the remaining minority shareholders (hereinafter, an MSO ). 1. TOB Under the FIEL, an off-market purchaser of the shares issued by a company required to file annual security reports (e.g., a listed company) is obliged to purchase the shares through a TOB which is subject to the tender offer rules provided in the FIEL, if the aggregate post-purchase ownership ratio of the purchaser and its related parties (tokubetsu-kankeisha) exceeds one-third (1/3) of the total voting rights (diluted-basis) in the target company. There are some exceptions where the purchaser is not obliged to implement a TOB so long as the purchaser sets a cap on the number of shares to be purchased through a TOB. Such exceptions, however, are not applicable in the Squeeze-Out context, since the purchaser needs a high post-purchase ownership ratio (say, 90%) in order to make the second step MSO legally robust. Page 2

4 It should be noted that a material violation of the regulations of the FIEL triggers not only criminal sanctions but also an imposition of surcharge liability (kacho-kin), which amounts to twenty-five percent (25%) of the total purchase price of the purchased shares. Disclosure Disclosure by Tender Offeror In order to commence a TOB, a tender offeror must make a Public Notice for Commencing Tender Offer (kokai-kaitsuke kaishi kokoku), which must be made either in the newspapers or by an electronic announcement via EDINET (Electronic Disclosure for Investors Network) followed by a public notice in the daily newspapers. A tender offeror must then file, on the date when it makes the Public Notice for Commencing Tender Offer, a Tender Offer Registration Statement (kokai-kaitsuke todokede-sho) with the Kanto Local Finance Bureau (hereinafter, the KLFB ). A Tender Offer Registration Statement filed with the KLFB is publicly available to anyone via EDINET. In addition to such filing, a tender offeror must prepare a Tender Offer Explanation Statement (kokai-kaitsuke setsumei-sho) which is almost identical to the Tender Offer Registration Statement, and must deliver it to tendering shareholders on or prior to the tender of their shares. In a Tender Offer Registration Statement, a tender offeror must disclose, in accordance with a specific form provided by the relevant ordinances, terms and conditions of the offer and information regarding the tender offeror and the target company in detail. Among others, it should be noted that the tender offeror must disclose: (i) a comprehensive plan of the contemplated Squeeze-Out, as well as an operation policy after the contemplated Squeeze-Out; (ii) the grounds for calculating the purchase price attaching a copy of an opinion from a third party thereof, if any; (iii) source of funds with supporting documents such as a copy of a commitment letter from a bank; and (iv) any agreements between the tender offeror and the target company or its directors or officers (shikkouyaku) in connection with the TOB. The tender offeror must promptly file an Amendment Registration Statement of Tender Offer (teisei todokede-sho), when: (i) the tender offeror finds any information disclosed in the Tender Offer Registration Statement insufficient or incorrect; (ii) the tender offeror changes any terms or conditions of the purchase (subject to restrictions stated below); or (iii) material events relating to the items to be disclosed in a Tender Offer Registration Statement occur. The Amendment Registration Statement of Tender Offer is publicly available via EDINET and the contents thereof must be delivered to shareholders who are eligible to receive a Tender Offer Explanation Statement. When the TOB is successfully concluded, the tender offeror must make a public notice or public announcement with respect to the results of the TOB, such as the number of tendered shares on the day following the end of the offering period, and must file the Tender Offer Report (kokai-kaitsuke hokoku-sho) stating the contents of the public notice or public announcement with the KLFB. The tender offeror must deliver the notice of purchase containing information such as the number of shares to be acquired by the tender offeror to the tendering shareholders without delay after the expiration of the offering period. The tender offeror must also file a Large Shareholding Report (tairyo-hoyu hokoku-sho) or amendment report thereof within five (5) business days after the TOB period has expired and/or the settlement of share purchase. Disclosure by Target Company The target company must file a Position Statement Report (iken-hyomei hokoku-sho) which states its opinion with respect to the TOB, i.e., whether the target company supports or opposes the TOB or withholds expressing its opinion, and other items specified in the relevant ordinances with the KLFB within ten (10) business days from the date of the Public Notice for Commencing Tender Offer. Among others, the target company must disclose: (i) the process that lead up to its position and the reasons for its position; (ii) the measures taken, if any, to avoid conflicts of interest with its Page 3

5 shareholders when the TOB is made as an MBO or a TOB by a parent entity; and (iii) the plan to introduce or invoke any takeover defense measures and the details of such defense measures. While the FIEL does not require so, the MBO Guidelines recommend that the target company should obtain an opinion regarding the offering price from an independent third party expert and disclose the contents thereof in the Position Statement Report. In practice, most of the target companies comply with this recommendation by the MBO Guidelines. Furthermore, the target company may ask questions to the tender offeror in the Position Statement Report. In such case, the tender offeror must file the Report for Responding to the Questions (shitumon kaito-sho) describing its answers to those questions with the KLFB within five (5) business days from the date when the tender offeror receives a copy of the Position Statement Report. Although the tender offeror may choose to not answer such questions, it must state the reasons thereof in the Report for Responding to the Questions. Regulation of Terms of TOB The FIEL provides for not only the disclosure regulation explained above, but also for various regulations on the terms of the TOB. Offering Period The offering period must be no less than twenty (20) business days and not more than sixty (60) business days from the date of the Public Notice for Commencing Tender Offer. The target company may request an extension of the offering period in the Position Statement Report when the offering period originally set by the tender offeror is less than thirty (30) business days, and thereby the offering period will be automatically extended to thirty (30) business days. It is noted that the MBO Guidelines recommend that the minimum offering period should be thirty (30) business days in order to give shareholders sufficient time to make decisions. In practice, in many cases, the offering period is set as thirty (30) business days, in consideration of the recommendation in the MBO Guidelines. Offering Price The offering price must be equal for all the tendering shareholders. Although it is not explicitly referred to for terms other than price, material terms must also be equal in practice. Other than this equality rule, there are no regulations, such as the best price rule, on the offering price. It is noted, however, that according to the FSA s interpretation, remuneration to the target management which is to be paid out after the TOB based on an agreement between the tender offeror and the management may be considered as consideration for the shares they tender in the TOB, depending on the specific circumstances. Cap/Floor on the Number of Shares to be Purchased The tender offeror may set a cap on the number of shares to be purchased in the Public Notice for Commencing Tender Offer and the Tender Offer Registration Statement so long as the shareholding ratio of the tender offeror after the TOB would not exceed two-thirds (2/3) of the voting rights in the target company. If the number of tendered shares exceeds such cap, the tender offeror must purchase the tendered shares on a pro rata basis. While the FIEL provides no other restrictions on the number cap, in practice, in the Squeeze-Out context, the cap is rarely used since the goal of the TOB is to purchase as many shares as possible in order to secure the legality of the MSO step. The tender offeror may set a floor number of shares to be purchased in the Public Notice for Commencing Tender Offer and the Tender Offer Registration Statement. In such case, the tender Page 4

6 offeror may refuse to purchase the tendered shares at all when the number of the tendered shares does not reach the floor number of shares to be purchased. In addition, the MBO Guidelines indicate that a higher floor number is desirable. In practice, the floor number is often set to two-thirds (2/3) of the voting rights, which is the minimum number required for a shareholder vote in the MSO step. Prohibition of Purchases outside TOB Procedures The tender offeror and its related parties are prohibited from purchasing shares outside the TOB procedures, except for the limited cases as specified in the FIEL and relevant ordinances, which rarely apply in practice. Restriction on Changes of Terms of TOB The tender offeror may not make changes that are unfavorable to the shareholders of a target company to the terms of the TOB, except for the limited cases as specified in the FIEL and relevant ordinances, which rarely apply in practice. Such prohibited changes include: (i) reducing the offering price; (ii) decreasing the cap number of shares planned to be purchased; (iii) increasing the floor number of shares to be purchased; (iv) shortening the offering period; and (v) extending the offering period beyond the statutory period described above. Restrictions on Withdrawal of TOB The tender offeror may not, in principle, withdraw the TOB after the Public Notice for Commencing Tender Offer, unless material changes or material impedances stipulated in the Public Notice for Commencing Tender Offer and the Tender Offer Registration Statement occur to the target company. Such material changes and impedances typically include a merger of the target company, implementation of anti-takeover measures, or a failure to obtain necessary government approval with respect to the share purchase. Independent Committee In order to mitigate a possible conflict of interest between the management of the target company and minority shareholders thereof, the MBO Guidelines recommend the target company to form an independent committee of which the members are independent from the management and the tender offeror. Although in most Squeeze-Out cases, especially in cases where it is categorized as an MBO, the target company forms an independent committee, of which the composition and the authority vary on a case-by-case basis. Although we would not say that such an independent committee is indispensable, considering the current trend in Japan, it is worth considering to have the target company form an independent committee in order to make the Squeeze-Out process more robust against possible challenges by the dissenting shareholders. Other Regulations to be Considered If the sales in Japan (as defined under the Anti-monopoly Act, which is the amount of revenue directly or indirectly realised in Japan (including from off-shore and through third parties) on a group basis) of the tender offeror exceed twenty (20) billion yen and the sales in Japan of the target company exceed five (5) billion yen, the tender offeror must file a plan of share acquisition thirty (30) days prior to the settlement of the TOB (such period may be shortened if it is apparent that such acquisition would not have an anti-competitive effect). If the tender offeror is a foreign entity, it is also required to file a pre-notification or post-report, depending on the business operated by the target company, to the Bank of Japan under the Foreign Exchange and Foreign Trade Act. Page 5

7 Depending on the business operated by the target company, share acquisition may be restricted (such as a broadcasting company) or subject to prior approval (such as a bank). Due diligence in advance for such specific regulations is highly recommended. In the case where a substantial portion of shareholders of the target company is composed of foreign investors, it should be also checked whether foreign securities regulations would apply to a TOB in Japan. It is well known that the U.S. securities regulations may apply to a TOB for shares of a Japanese company under certain circumstances. Finally, if the tender offeror knows material non-public information relating to the target company, purchase of the shares by the tender offeror may violate the insider trading regulations under the FIEL. In this respect, it is important to control the flow of information from the target and ensure that all material information is made public on or prior to the commencement of the TOB. 2. MSO After the first step TOB described above, in order to complete a Squeeze-Out, the target company must undertake an MSO. Although, in theory, other legal schemes can be used in order to make the target a wholly-owned entity by the acquirer, in practice, the measure of utilizing shares subject to call (zenbu-shutoku-joukoutsuki-kabushiki ) is used in order to avoid adverse tax consequences. The exact mechanism of the above measure is so complicated and technical that we will focus on some key issues to be noted. Schedule An MSO procedure is essentially a process where the target company sells the stakes held by remaining shareholders on behalf of them to the acquirer regardless of the preference of each remaining shareholder. For such a sell out, resolutions by a general shareholders meeting and an approval by the court are necessary. Since the target company remains as a listed company even after the TOB, at least two months are necessary to convene a shareholders meeting, including fixing a shareholders list and dissemination of a convocation notice. After the shareholders meeting, at least one to two months are necessary in order to obtain the necessary approval by the court. That is, at least three to four months are necessary after the TOB is settled. Squeeze-Out Price MSO procedures are subject to review by the court in its final stage. While there is no explicit regulation on the price paid to remaining shareholders (hereinafter, Squeeze-Out Price ), it is likely that the court would not issue the necessary approval if the Squeeze-Out Price is below the price offered in the course of the precursory TOB process (hereinafter, TOB Price ). Therefore, it is customary to set the Squeeze-Out Price the same as the TOB Price. Shareholders Meeting In a shareholders meeting, several resolutions with respect to the MSO procedure are necessary, which require two-thirds (2/3) or more of affirmative votes from the shareholders present at the meeting. Since the acquirer may vote in such shareholders resolutions, assuming that the shareholding ratio of the acquirer after the TOB is two-thirds (2/3) or more of the voting rights, it is certain that such resolutions are upheld in the shareholders meeting. Page 6

8 The target company must, however, answer questions made by remaining shareholders in the shareholders meeting, insufficient answer to which may be a cause of revocation of the shareholders resolution. 3. Squeeze-Outs in Privately-Held Companies The squeeze-out process mentioned above is basically applicable to a privately-held company (nonlisted company). However, since except for rare cases, the purchase of shares in a privately-held company is not subject to the TOB regulations under the FIEL, the purchaser may purchase the shares from minority shareholders in a more flexible manner. There are no procedural regulations, including disclosure requirements and the equal-price rule. An MSO is also available for a privately-held company. In practice, however, because no market price or other objective index for the fair value is available, negotiations with minority shareholders could be difficult. POTENTIAL CHALLENGES BY MINORITY SHAREHOLDERS Among various legal measures available for dissenting shareholders, one should seriously consider risks of: (i) revocation of shareholders resolutions necessary for the MSO procedure; (ii) appraisal remedy available to the remaining shareholders; and (iii) shareholders suit against directors and/or statutory auditors of the target company. Revocation of Shareholders Resolutions The Companies Act provides that, if the terms and conditions of such resolution are materially unfair to the minority shareholders as a result of the exercise of voting rights by party(ies) with special interests, such resolution shall be revoked by a lawsuit brought by a minority shareholder. In theory, such risk always exists in a two-step Squeeze-Out scheme described above. To mitigate such risk, among other considerations referred to in the above section, it is important that: (i) the shareholding ratio after the TOB is as high as possible, typically more than 90%; (ii) the TOB Price and the Squeeze-Out Price are the same; (iii) an independent committee is formed to ensure the fairness of the Squeeze-Out process as a whole; and (iv) the target company has provided as much information to support the shareholders decisionmaking, including obtaining a third party s opinion as to the appropriateness of the TOB Price and disclosure of the contents thereof. In fact, there has been no case where shareholders resolutions have been revoked with respect to a Squeeze-Out. Appraisal Remedy Shareholders remaining at the time of the shareholders meeting mentioned above are entitled to an appraisal remedy, where a shareholder may file a petition to the court for determination of a fair share price for the MSO procedure within twenty (20) days from the day of the shareholders meeting approving the MSO procedure. There is no explicit criteria in laws or rules to determine a fair price for a Squeeze-Out, thus it is up to the discretion of the court. Recent court decisions, including ones made by the Supreme Court of Japan, the highest court in Japan, have decided that the fair price shall be substantially, say, more than 20%, higher than the Squeeze-Out Price set by the target company and the acquirer. Not only individual shareholders who are emotionally hostile to a Squeeze-Out, but also sophisticated investors are now considering the option of holding the shares during the TOB process and exercising Page 7

9 an appraisal remedy in the end, with the hope that the ultimate price may be higher than the TOB Price. In a practical sense, the existence of the appraisal remedy is the most practical challenge to a successful Squeeze-Out. Shareholders Suit against Directors and/or the Statutory Auditor of the Target Company Recently, ex-shareholders of a company which has completed a Squeeze-Out are seeking to hold liable the directors and/or statutory auditors of the target company on the grounds that they breached a duty to protect shareholder value by supporting a Squeeze-Out with an insufficient price. From a theoretical viewpoint and case precedents, the likelihood that the court will uphold such exshareholders claims is not so high. The court s reaction, however, should be carefully monitored. CONCLUSION As mentioned at the outset, a Squeeze-Out is a relatively novel legal technique in Japan. Relevant laws and rules are still vague and under development. More than other legal areas, it is important to catch up on the latest development when you are interested in planning a Squeeze-Out in Japan. It should be also noted that, as is apparent in the explanation in this chapter, cooperation and coordination with the target company is indispensable in order to complete a Squeeze-Out smoothly. Although a hostile Squeeze-Out is still possible in theory, extremely careful planning is required in order to complete a Squeeze-Out process without the target company s cooperation, for example, in neutralizing a defense measure taken by the target company. Page 8