Japan’s new anti-takeover rules could fuel protectionism, investors warn

Investors will warn the Japanese government this week that a planned overhaul of anti-takeover rules may offer companies covert protection from hostile domestic bids, foreign buyers and shareholder activists.

Investors, wary of more protectionism in a market where takeovers of listed companies are rare and corporate managements are often reluctant to give priority to investors, told the Financial Times that the composition of the Fair Acquisition Study Group set up to discuss the new rules appeared severely skewed against the interests of shareholders.

The group was formed last November and is soliciting public comment over a tight three-week window ending this week. “We prepare our comments with a sense of urgency and deep concern. While many of the suggestions seem reasonable, [the study group’s] Members and advisors hail from the camp that has traditionally been called upon to thwart activists and hostile takeovers, and the concern is that these are the people making the rules,” said the head of a US-based fund that attended several activists was involved in situations in Japan.

With strong representation from Japan’s conservative business and academic establishments, the 17-strong study group includes lawyers and investment bankers with specific expertise in defending against unsolicited takeover bids and campaigns by shareholder activists.

There are no foreigners on the board, although non-Japanese funds hold about a third of the Japanese stock market, and the only foreign fund represented is BlackRock – an institution whose historical voting patterns mean it is widely seen as supporting Japanese management .

A Ministry of Economy, Trade and Industry (Meti) official who helped draft the guidelines said lawyers known for helping companies introduce anti-takeover measures were deliberately asked to help the panel to join as the new rules wouldn’t work without their co-operation. “If we want to ensure that abuse of anti-takeover measures is avoided, we need to involve lawyers who actively use these measures,” the official said.

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Representatives from more than six global funds said they have hired lawyers and are preparing to make public comments to Meti by the March 15 filing deadline.

The funds fear the new guidelines could be overly protectionist, giving target companies an excuse to block an offer beneficial to shareholders, a lawyer said.

Masatoshi Kikuchi, chief equity strategist at Mizuho Securities, said that despite Meti’s efforts to reduce the supply of preemptive takeover measures and other “poison pill” strategies available to Japanese companies, there has been an increase in companies who instituted targeted anti-anti-measures – takeover plans in response to attacks by activist investors. One of these schemes was designed by a lawyer advising the study group.

According to Meti, it wants to update the rules on anti-takeover measures because they do not cover the target-specific defensive measures, which it believes should require shareholder approval before adoption.

Lawyers representing the funds said their warnings this week would focus on three key areas where they felt slurred language could allow management to bury potential offers. Her first concern centers on the suggestion that when considering a proposed M&A deal, the board should assess whether it would enhance the target company’s “enterprise value” — a term vague enough to allow the board to enter a Blocking an offer he doesn’t like, even if he likes it.

Meti’s consultation paper also suggests that when a company receives a “concrete” takeover proposal, management should undertake a preliminary analysis and have it reviewed by the board. Investors worry that management may be reluctant to share information with board members because the term “specific” is unquantifiable.

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Meti’s proposals also do not make clear if and when a target company should allow a potential buyer to conduct due diligence on non-public information. The volume of publicly available information is limited in Japan compared to other developed stock markets.

The concern, said a lawyer representing several funds, is that members of management should not be encouraged to thwart an offer by preventing a bidder from conducting due diligence.

According to Meti, the new guidelines were specifically aimed at preventing management from hiding a “specific” takeover bid from the board. The term would be determined after gathering public opinion, but for now, Meti is considering a concrete offer with a takeover price and a target date for the takeover.

“When Japanese companies make acquisitions abroad, they usually make unsolicited offers. And yet they are reluctant to make unsolicited offers on domestic deals due to reputation issues. We want to change that,” said the Meti official.