[Originally posted, with full hyperlinks, at http://eastasiaforum.org/author/lukenottage/]
As outlined in FDI and Corporate Governance in Japan, in the context of growing inbound FDI and M&A activity, Japan is developing a hybrid approach to setting parameters for hostile takeovers. It is worthwhile taking a closer look at a third Report recently from a Study Group playing a major role, along with the courts, in elaborating Guidelines on permissible defensive measures. The Group’s membership seems to be changing, and differences are emerging compared to both the Anglo-Australian and American approaches to substantive rules on takeovers as well as the process for defining them.
One extreme approach is the UK City Code model dating back to 1968. It completely disallows poison pills issued by target firms’ incumbent directors, and resolves disputes through a very informal and quick ‘Takeovers Panel’. This generates much higher levels of hostile takeovers and success rates compared to the US, where Delaware courts allow target directors much more leeway. News Corp reincorporated there because Australia tends towards the stricter UK model, although our own Takeovers Panel came much later and is more formalised. In Japan, some commentary in 2005 viewed some renewed hostile takeovers and case law (such as Horie’s livedoor adventures) as a shift towards the Delaware model. But in some ways Japan’s substantive rules governing takeovers disputes, and the process by which they are generated, may be viewed as lying between Delaware and the stricter Anglo-Australian approach towards promoting a market for corporate control.
Substantively, last year’s Bulldog Sauce judgment from the Supreme Court confirms that Japanese law gives much greater weight to approval of at least some types of poison pill by shareholders, compared to Delaware law’s deference to incumbent (but supposedly independent) directors. This tendency is reinforced by a third Report issued on 30 June 2008 by the Corporate Value Study Group within the Ministry of Economy, Trade and Industry (METI). These note the importance of shareholder approval when actually activating poison pills, following a hostile takeover bid. Guidelines initially published by the Group in 2005, under the joint aegis of METI and the Ministry of Justice (MoJ), had discussed this more in the context of initially deploying defensive measures, including situations before a bid had emerged. The extra emphasis on shareholder approval in this year’s Report, elaborating the Guidelines, has come as quite a surprise.
Some skeptics may object that this emphasis is unrealistic given the inexperience and relative passivity of shareholders in Japan, despite the dramatic rise in foreign ownership of listed companies. Such views may be especially common among those familiar with the US approach, or from law firms keen to market US-style poison pills to incumbent directors in Japanese companies. From an Australian perspective, it is interesting that the 1969 ‘Eggleston Principles’ transplanted from the UK its strict substantive rules against other defensive measures, which also give much weight to shareholder approval, even when Australia had (and still has) many more block-holders and less active institutional investors. Yet a hostile takeovers market did eventually become a more significant part of Australia’s corporate governance landscape, even though other features remain less favourable to dispersed shareholders (as shown in a recent Sydney Law School Research Paper). Perhaps Japan’s policy-makers are hoping for a similar long-term transformation in their own corporate governance mix.
Regarding the process by which these substantive rules are being elaborated, Japan is also a hybrid. There is not much awareness or interest in a more informal Takeovers Panel (although an Australian lawyer advocates this model in my forthcoming co-edited book). Yet the case law now emerging from regular Japanese courts seems to have quite a symbiotic relationship with the publications of the Study Group. The judgments sometimes reflect and therefore consolidate the Group’s views, but sometimes influence them in new directions. On a more regular basis, Takeovers Panels in the Anglo-Commonwealth tradition not only resolve pending takeover disputes, but also issue new or updated guidance notes on specific topics.
One key question in tracking and predicting developments in Japan, therefore, is the composition of the Study Group issuing takeovers Guidelines and other reports. The strict UK rules favouring takeovers were entrenched in 1968 after a political as well as economic battle won by institutional investors over incumbent directors and their merchant bank advisors. Within Japan’s Study Group, therefore, are representatives of the former (or other pro-takeover interests) growing relative to representatives of the latter (or other interests preferring more managerial discretion and safeguards)? Perhaps so, as suggested by the attached Table (cvsgreport).
The 2005 Study Group, whose 21 members generated the initial Guidelines, was succeeded by a second in 2006, whose 28 members compiled a Report arguably giving more weight to shareholder interests. The seven additional members in that second Study Group comprised two professors (assumedly more neutral), two extra securities firms (probably also more interested in increased takeover activity) and two institutional investors (including the increasingly influential Pension Fund Association), versus only one merchant banker. The 2008 Study Group, whose 29 members compiled the recent further Report, no longer included the Association’s representative; but the Group added a pension fund, an investment fund and a hedge fund, as well as a private equity association. A life insurer was replaced by its research institute, and as two more professors were added as well as a law firm (albeit American!). A journalist was no longer in the Group, but the most noticeable change was the loss of four major manufacturers – including Toyota, long sceptical about hostile takeovers.
We need closer analysis of all institutions represented in the Study Group since 2005, but this does suggest some shift towards those more minded to restrict defensive measures deployed and activated by incumbent managers of takeover targets. Admittedly, the 2008 Study Group and its Guidelines were generated under the aegis of METI. But the joint involvement of the MoJ was quite unique in 2005 – needed to assuage concerns in the business community following the Horie saga, along with the implementation of a final major consolidation of corporate law. And perhaps Professor Leonard Schoppa is correct in suggesting that METI itself is transforming itself, at least in some cases and relative to other influential policy-makers, as a champion of market liberalisation.
Don’t get me wrong. As in Australia, it may take decades for the “law on books” in this field to make much real difference within the overall corporate governance system. Australia’s Takeovers Panel only took over from regular courts from 2000, and had to survive another constitutional challenge last year. For the foreseeable future, Japan is likely to keep shoehorning complex M&A disputes into the courts, even if they get indirect assistance from the work of the Study Group and other experts. And stronger defensive measures than those permitted in Australia or the UK can still be deployed and activated in Japan, especially if approved by shareholders, which may well turn into a formality. Also remember that no hostile takeover of a major Japanese company has yet succeeded. For better or worse, the interests of stable shareholders and main banks, incumbent managers and (arguably diminishing) core ‘lifelong’ employees, remain important. Under these circumstances, it may still make more sense (and yen) for the more activist shareholders to displace dubious directors directly, as Steel Partners did with wig-maker Aderans in May this year.
Further reading: Nottage, Luke R., Corporate Governance and M&A in Australia: An Overview for Assessing Japan and the ‘Americanisation’ Thesis, (March 2008) Sydney Law School Research Paper No. 08/28
