New METI Guidelines for Corporate Takeovers – Impact on Public M&A in Japan

On 31 August 2023, METI published the “Guidelines for Corporate Takeovers – Enhancing Corporate Value and Securing Shareholders’ Interests” (the “2023 Guidelines”), aiming to provide fair rules and best practices for public M&A activities in Japan, with a focus on how parties should behave in the context of acquiring corporate control of a Japanese listed company.

Compiled through discussions at the Fair Acquisition Study Group (the “Study Group”) launched by METI in November 2022, the 2023 Guidelines focus on the following three principles.

The 2023 Guidelines are likely to significantly influence inbound public M&A activities in Japan, providing clear guidance to international buyers considering acquisitions of Japanese listed companies, both strategic and financial.

In formulating the 2023 Guidelines, the Study Group exchanged opinions with a number of interested parties. For instance, during the public consultation period, the Consulate General of Japan in New York hosted a briefing on the draft guidelines, in an effort to obtain input from a wider range of market participants in Japan and abroad.

The 2023 Guidelines aim to bring Japanese public M&A practices closer to global standards, by incorporating principles such as shareholders’ intent and the board’s responsibility as fiduciary, to make the Japanese corporate control market more accessible to international buyers.

The 2023 Guidelines provide clear rules and best practices regarding acquisition proposals, with which a board of a listed target company ought to comply. Historically, the following instances were observed in the Japanese market:

To address these issues, the 2023 Guidelines provide clarity on how an acquisition proposal made to a target company should be handled by its board. They focus on the enhancement of corporate value, assessed quantitatively, and clarify that a company in receipt of a “bona fide offer” (an acquisition proposal that is specific, has a rationale of purpose and is feasible) should properly consider it.

The 2023 Guidelines expect the board to give “sincere consideration” to a bona fide offer in order to determine whether it serves the interests of shareholders. It is inferred that directors should not close off an opportunity that has the potential to deliver shareholder value, without good reason for doing so. Accordingly, the 2023 Guidelines are expected to mitigate the risk of managerial entrenchment, benefiting potential buyers who might otherwise be wary of simple rejection of their offer or of interfering defensive tactics being adopted by the target company.

Furthermore, in accordance with the principle of transparency, the 2023 Guidelines emphasise that material information related to acquisitions (eg, the purpose of the acquisition, details of the acquirer and post-acquisition management policy) should be disclosed by both the acquirer and the target company. The 2023 Guidelines also state that shareholders as well as the board should be given sufficient time to consider the offer. Increased transparency of the process will enable stakeholders, including shareholders, to assess the merits of the acquisition proposal and make an informed judgement.

Since the 2023 Guidelines were announced last summer, they quickly emerged as practical standards referred to in Japanese public takeover cases and became an important part of the framework for Japanese public M&A activities. Despite potential challenges in the enforcement of such guidelines as “soft law” in specific situations, it is worth noting that the 2023 Guidelines will serve the interest of buyers in terms of transparent acquisition processes, smoother interactions with stakeholders and potentially higher chances of successful deal-making and value creation.