This article has been divided into two parts. Part I1 covered the scope, basic principles and perspectives of the Guidelines for Corporate Takeovers (the "Guidelines")2 as well as the code of conduct that directors and the board of directors must observe concerning acquisitions. This Part II discusses increased transparency of acquisitions and takeover response policies and countermeasures.
I. Greater Transparency of Acquisitions
1. Disclosure of Information and Provision of Time by the Acquiring Party
At each stage of its progress in acquiring the shares of a target company, the acquiring party is expected to comply with the large shareholding reporting rule, the tender offer rule, and other regulations to increase transparency. Based on such rules and regulations, it would be ideal for the acquiring party to provide shareholders not only sufficient information but also enough time to make an informed decision.
(a) Disclosure of Information at the Time of Acquisition
The acquiring party should aim to provide the capital markets and the target company with at least the same level of appropriate information as contained in the tender offer registration statement and in a timely manner and in an appropriate form. Such minimum information includes the purpose of the purchase, number of shares to be purchased, summary of the acquiring party, and basic management strategy after the acquisition.
(b) Disclosure of Intent to Acquire
If the party intending to make an acquisition is definite about its intention to make a subsequent tender offer, then prior to such tender offer, it would be ideal for it to provide information to the capital markets and the target company when it is moving ahead with its plan to purchase the target company's shares in the market.
(c) Information Disclosure of Advance Notice of Planned Tender Offer
When announcing an advance notice of a planned tender offer, the potential acquirer should aim to have a reasonable basis for actually commencing such tender offer, such as having the financial resources needed for the acquisition, and disclosing specific information that can contribute to market understanding, such as the conditions for the launch of the tender offer and the scheduled commencement date thereof.
If an advance notice of a planned tender offer is announced, but such tender offer cannot be commenced within a reasonable period of time in light of market stability, then in principle, it is advisable to withdraw the notice.
(d) Information Provision and Disclosure of Substantial Shareholders
If the person making the acquisition proposal is a "substantial shareholder," then the target company must be provided with information regarding the fact that the acquirer is a substantial shareholder as well as its relationship with the nominee shareholder(s).
The acquirer should respond in good faith when asked by the target company about the extent to which there are any joint holders.
If a target company recognizes based on objective facts the possibility of an acquisition by a specific entity or person, and seeks to confirm certain facts to engage in a dialogue with that entity or person, then such entity or person should confirm certain facts such as whether it is a substantial shareholder as well as the existence of any joint holder relationships.
As to custodians who are nominee shareholders for such entities or persons, they should cooperate in confirming certain facts regarding the "substantial shareholders" for which they hold shares after confirming the intention of such entities or persons.
(e) Provision of Time for an Acquisition Proposal to be Considered
The acquiring party should ideally set a longer tender offer period than originally proposed or extend the period for a reasonable time, taking into account the
needs of the target company and its shareholders.
2. Information Disclosure by the Target Company
An informed decision by the shareholders will be possible through substantial information disclosure by the target company.
(a) Disclosure at the Implementation Stage of an Acquisition
Ideally, the target company should voluntarily disclose in a full and complete manner information regarding the process of how the board of directors or the special committee considered the acquisition proposal and its involvement in the negotiation process with the acquiring party with respect to the transaction terms.
If any competing proposal is made, then the target company should disclose in the explanation of the reasons for supporting the offer that there was such other competing proposal, but that the target company decided that the offer being supported was more desirable together with the reasons for such decision.
(b) Disclosure of Information regarding Media Reports while Acquisition Proposal is Still Under Consideration
It should be noted that if media reports or rumors spread during the stage an acquisition proposal is being considered, then it may be necessary to disclose information regarding the accuracy of the information reported as well as other facts.
Careful consideration will be required in deciding whether to maintain strict information control, or instead disclose information about the acquisition proposal.
3. Preventing Acts that Distort Decision-Making by the Shareholders
It is important to ensure that shareholders are provided with the necessary information and are not prevented from making an informed decision. From this perspective, the following actions by either the acquiring party or the target company are not advisable (and any action that would constitute a violation of any law or regulation should not be taken):
II. Takeover Response Policies and Countermeasures
Regarding takeover response policies, establishing and disclosing the rules before a specific acquiring party appears (i.e., the normal phase) would enhance predictability among the stakeholders, such as acquirers and shareholders. However, there are circumstances where the assessment of the response policy differs between the company adopting it and institutional investors, and it is practically difficult to utilize it without obtaining the understanding and consent of the shareholders and institutional investors.
On the other hand, during an emergent phase, case-specific decisions may be suitable. Adopting a response policy after an acquiring party emerges (i.e., the emergent phase) is an option, though less predictable. In any event, reliance on the rational intent of the shareholders is crucial.3
1. Respecting the Intent of the Shareholders
Invoking a countermeasure based on a response policy should be based on the rational intent of the shareholders since it concerns corporate control of the target company. The legitimacy of invoking a countermeasure will be much more likely to be acknowledged if approval at a shareholders' meeting is obtained at the stage of either adopting the response policy or of invoking the countermeasure based on such response policy.
It must be noted that invoking a countermeasure based on a resolution passed at a shareholders' meeting which excluded the voting rights of the acquiring party, the target company's directors and their related parties from being counted must not be abused and may only be permitted in very exceptional and limited cases, taking into consideration the special circumstances of the case concerning the mode of acquisition, among other factors (such as coercion arising from the acquisition method, legality, and period for confirmation of the shareholders' intentions).
Invoking a countermeasure based on the judgment of the board of directors can be permitted only when the need for such action is high under specific circumstances, such as an acquisition by criminal elements or one where there is a high probability that the acquiring party will gain an unfair advantage at the expense of the target company and its general shareholders. In addition, it should be taken into account that there is an increased risk that such invocation of a countermeasure will be enjoined by a court if a resolution approving the same has not been passed at the shareholders' meeting.
2. Ensuring Necessity and Proportionality
The invocation of a countermeasure based on the response policy should be carried out in a manner that is based on necessity and proportionality, taking into consideration, among other factors, the principle of shareholder equality, protection of property rights, and prevention of abuse by management to protect its own interests.
3. Prior Disclosure
By adopting and disclosing the response policy during the normal phase, predictability can be enhanced among the acquiring parties, shareholders and other stakeholders anticipating the possibility of a countermeasure being utilized in the event of an acquisition of more than a certain number of shares. In addition, just because it is predictable that a countermeasure may be used, it does not necessarily mean that there is a possibility of avoiding the invocation of such countermeasure, and thus, it is considered important to have a high degree of predictability as to "in what circumstances the countermeasure will be used."
4. Communication with the Capital Market
If a target company is considering adopting a response policy, it must first make reasonable efforts to enhance corporate value during the normal phase, and then take steps to ensure that such increase in its corporate value is reflected in its market capitalization.
If the target company believes that the adoption of a response policy is necessary as part of its management strategy, then it should communicate and disclose information in detail regarding its reasons for adopting such response policy, ensure fairness by
enhancing the independence of the composition of its board of directors (for example, by increasing the ratio of outside directors to at least majority of the members of the board), and respect, to the maximum extent possible, the judgment of a special committee consisting mainly of outside directors.
Below are examples of possible features that would make it somewhat easier to gain the understanding of institutional investors when engaging in dialogue and information disclosure activities with them:
(a) Design the response policy to always require a resolution passed at a shareholders' meeting when a countermeasure is being invoked;
(b) Design the response policy so that the requirements to trigger an invocation of a countermeasure are strict; and
(c) Design the response policy as a temporary measure to be used under special circumstances.
III. Concluding Remarks
As mentioned in the introduction of Part I, the Guidelines clearly state that the economy of Japan is aiming to have a soundly functioning market in acquisitions involving the transfer of corporate control and welcomes active acquisitions that contribute both in enhancing corporate value and securing the interests of shareholders.
While the Guidelines are not legally binding, they outline the principles and best practices, and serve as a code of conduct for target companies, acquiring parties, directors, shareholders, investors, advisors, and other relevant parties at each stage of an acquisition in which an acquiring party wishes to acquire corporate control of a listed company by acquiring its shares. Therefore, it is anticipated that the Guidelines will have a significant impact on the practice of M&A in Japan.
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https://www.ohebashi.com/jp/newsletter/NL_en_2024spring_Ogata.pdf