Japan has long been viewed as a country where mergers and acquisitions (M&A) are rare and hostile takeovers are nonexistent. However, recent developments have dramatically changed this picture. To examine these developments, the Center for Japanese Legal Studies at Columbia Law School and the Center on Japanese Economy and Business at Columbia Business School cosponsored a seminar on Friday, October 12, entitled “Japan’s Emerging M&A Market: Defensive Measures, Judicial Review, and Insider Trading.” The seminar was organized by Mori, Hamada, and Matsumoto, a Tokyo-based law firm with extensive expertise in corporate mergers and acquisitions.
Satoshi Kawai and Yuto Matsumura, two partners of Mori, Hamada, and Matsumoto, provided an overview of current M&A activity in Japan during the seminar. Over the past decade, the number of transactions has soared from 531 in 1995 to 2,725 in 2005, a five-fold increase. The number and value of tender offers have also increased dramatically, from 41 tender offers valued at about ¥100 billion ($1 billion) in 1995 to 65 tender offers valued at ¥3.3 trillion ($28 billion) in 2006. Activity in management buyouts has been equally impressive, rising from just 1 transaction in 1996 to 80 transactions worth ¥702 billion ($6 billion) in 2006.
Legislative Changes Facilitating M&A
This momentum is expected to continue as recent legislative changes facilitate M&A. The new Company Law provides both flexibility and transparency for acquirers of Japanese companies. Under previous legislation, only stock-for-stock mergers were allowed, but the new Company Law allows for cash, stock, warrants, and other types of assets to be used in acquisitions. Triangular mergers and cash-out mergers are now permitted, and the approval process for mergers has been streamlined.
In addition to friendly M&A activity, the past several years have witnessed a number of unsolicited bids, from Livedoor’s dramatic attempt to take control of Nippon Broadcasting System in 2005 to Steel Partners’ failed bid to purchase Bulldog Sauce in 2007. In 2005, the Ministry of Economy, Trade, and Industry and the Ministry of Justice jointly promulgated guidelines on hostile takeovers, which authorized the use of the shareholder rights plan (more commonly known as the “poison pill”) as a defensive measure.
Along with the boom in M&A activity, litigation involving battles for corporate control has increased dramatically in the past few years. Japanese courts have been asked to rule on the validity of defensive measures taken by incumbent managers, both before and after the appearance of a hostile bidder. Special attention was devoted to an analysis of the recent case involving Steel Partner’s bid for Bull Dog Sauce, which generated opinions by three Japanese courts, including the Supreme Court.
The full impact of all this legal and market activity is still unclear. However, as the market develops, unsolicited bids are expected to become more common and ultimately successful. These issues will be played out in Japanese boardrooms and courtrooms in the coming years as the economy evolves and becomes more accepting of corporate takeovers.
Professor Curtis Milhaupt, moderator of the session, pointed out that to date none of the unsolicited bids have been successful, and he expressed puzzlement at several instances of seemingly contradictory behavior by Japanese shareholders in relation to the bids. Mr. Kawai suggested that as the market develops, unsolicited bids will become more common and ultimately successful.
Professor John C. Coffee Jr. predicted that Japan will witness a continuing struggle for control over the lawmaking process in this key area between ministry officials, legislators, and the courts. He also noted that in the United States, the appearance of the poison pill converted an economic decision by the shareholders (whether to sell to the bidder) into a voting decision (whether to oust the incumbent board that was blocking the bid). Coffee argued that because shareholding structures and behavior are different in Japan, Japanese managers may enjoy greater protection from hostile bids than do U.S. managers.
Professor Ronald Gilson argued that in the United States, legal rules making hostile takeovers difficult were eventually overtaken by norms and practices developed by market players, since the economics of the deals ultimately drive the results. He predicted that the Japanese market will undergo a similar transformation, as market players come to realize the value of changing ownership of corporate assets.
Insider Trading and Legal Analysis
In the second session of the day, Katsumasa Suzuki, also of Mori, Hamada, and Matsumoto, analyzed Japanese insider trading law and commented on the recent conviction of Yoshiaki Murakami, a well-known activist investor, for insider trading. The Financial Instruments and Exchange Law, which took effect on September 30th of this year, imposes stricter penalties for insider trading and sets out detailed rules on the elements of the offense.
Mr. Suzuki contrasted the flexible, court-based definition of insider trading under U.S. law with the more rigid, rule-based approach of Japanese law. He examined the Tokyo District Court’s reasoning in convicting Murakami of insider trading, which had been watched closely by the business community and the general public in Japan due to Murakami’s high profile and activist approach as an investor.
The full impact of all this legal and market activity is still unclear. However, as the market develops, unsolicited bids are expected to become more common and ultimately successful. These issues will be played out in Japanese boardrooms and courtrooms in the coming years as the economy evolves and becomes more accepting of corporate takeovers.
Professor Jeffrey Gordon noted the inherent difficulty of legislating detailed rules for complex market activity and argued that the courts in any system will inevitably be forced to interpret statutory language in making decisions about insider trading. He showed that even in the United States, where courts are said to play a much bigger role, insider trading in connection with tender offers is regulated by a detailed statute that is similar to the Japanese law in its approach. Thus, the often-asserted distinction between civil law and common law systems breaks down upon close examination.
Carlton Vann, MBA 2008, assisted in the preparation of this summary.