JAPAN: An Introduction to Corporate/M&A: Domestic

The Japanese M&A Market 

Japan is an island nation with a unique business culture and has, for a long time, been more of an outbound country when it comes to M&A activities. From the 2,890 transactions in 2023 (Jan. to Sept.) that were counted by available statistics, 2,203 were domestic (= seller and buyer Japanese), 482 outbound (= buyer Japanese targeting non-Japanese company) and only 205 inbound (= buyer non-Japanese targeting Japanese company). This may be the reason why, at first glance, the Japanese M&A landscape may seem somewhat unfamiliar from a Western perspective. At the same time, Japan’s legal system takes a lot of inspiration from Western countries, mainly Germany, France and the US so that basic concepts and mechanism are actually quite similar.

Lack of Growth in 2023 

In the January-September period of 2023, the overall Japanese M&A market saw a drop of around 12% compared to the corresponding period of 2022. One should be careful, however, not to take this as a general or continuous downtrend prematurely. It is rather that the Japanese M&A market had reached a record high in 2022 so that, to a certain extent, the figures for 2023 could be seen as a market normalisation. Many Japanese companies continue to be cash-rich and under pressure from their shareholders to spend the money on promising targets inside and outside Japan. At the same time, the interest of foreign investors in the Japanese market is growing these days in light of Japan’s economic stability, technical advancement and buying power. Another reason for this may be that investors are looking at Japan as an alternative to China where the environment for foreign investors has become more and more difficult. Also, as opposed to the rising interest rates that restrict availability of attractive financing for LBO transactions in the US and Europe, the Bank of Japan still maintains its negative interest rate policy. As a result, private equity funds continue to be active in Japan. Although there is speculation in the market that the Bank of Japan may end its negative interest rate policy relatively shortly (possibly in the first half of this year), it remains to be seen if any consequential raise of interest rates will bring the interest level to a same level as in the US or Europe.

Public M&A 

In the field of public M&A, 2023 has seen some significantly large transactions such as the acquisition of Toshiba by a consortium under the lead of Japan Industrial Partners (approx. USD13. billion), the acquisition of JSR by a Japanese government-backed fund (approx. USD6.4 billion) and the MBO of Taisho Pharmaceuticals Holdings (approx. USD 5 billion).

A clear upwards trend has been observed for a couple of years in public M&A transactions involving unsolicited/competing offers and competing proposals. Traditionally, so called hostile takeovers had been a very rare phenomenon in the Japanese M&A market, but this has changed. Prominent examples in 2023 were Nidec’s (initially) unsolicited takeover of Takisawa and M3’s and Dai-ichi lifes’ competing takeover bids for Benefit One Inc. The recent trend for unsolicited offers forced Japanese companies to develop defence strategies. Consequently, Japanese courts had (and have) to deal with an increased number of injunction cases against countermeasures (“poison pills”), and a number of significant decision were handed down over the last few years. This eventually led the Japanese Ministry of Economy, Trade and Industry (“METI”) to inaugurate a Fair Acquisition Study Group in November 2022. The objective of this study group was to develop best practices for anti-takeover measures for the parties involved in/affected by unsolicited takeover proposals. As a result of the work of the study group, METI published "Guidelines for Corporate Takeovers" on August 31, 2023.

Takeover Bids & Reporting Obligations 

In addition, the Financial System Council of the Financial Services Agency of Japan (regulatory authority supervising the finance sector) formed a working group for the reform of the regulations concerning takeover bids and reporting obligations systems for large shareholdings. Although this has not yielded any concrete regulatory measures yet, further legislative reforms and changes concerning public takeovers are expected to be implemented in the coming years.

Parent-subsidiary Listing 

As opposed to many other jurisdictions, parent-subsidiary listing is quite common in Japan. These structures have continuously been subject to criticism which eventually led to the introduction of new guidelines by the Tokyo Stock Exchange in December 2023, aiming at expanded disclosure obligations concerning the corporate governance structure of listed companies with controlling shareholders. Against this background, the market saw a number of transactions in 2023 to dissolve parent-subsidiary listings by taking over all shares in their relevant subsidiaries. Prominent examples are the 100% acquisitions of four listed subsidiaries by FUJISOFT Inc. and ITOUCHU Corporation’s 100% acquisition of its subsidiary, ITOCHU Techno-Solutions.

Renewable Energy Transactions 

2023 also saw a significant rise of transactions in the field of renewable energy since Japanese companies’ appetite in this area is constantly growing. This involved some very large transactions such as the acquisition of the Japanese Green Power Investment by consortium of NTT and JERA (according to news reports, approx. USD2.2 billion), the acquisition of the Belgian Parkwind NV by JERA (approx. USD1.4 billion), the acquisition of Japan Wind Development by Infroneer Holdings (approx. USD1.4 billion) and the acquisition of the Japanese SB Energy by Toyota Tsusho (approx. USD800 million).

Conclusion 

As this brief introduction hopefully showed, Japan’s M&A market continues to be rather active. This applies, of course, for the domestic and outbound transactions, but more and more for the inbound transactions as well. As for the latter, international investors have become less reluctant to face the complexity and uniqueness of the Japanese market. At the same time, many Japanese companies, in particular the bigger ones, have significantly increased their international know-how increasing speed and transparency in communication. The same applies for many law firms in Japan who have internationally trained teams to help foreign clients maneuver the high waters of doing business in Japan.