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Takeover Tactics
6. Takeover Tactics

[Last updated: 1 January 2025, unless otherwise noted]

6.1 Inside information

A Japanese listed company is obligated under the stock exchange rules to disclose to the public in a timely manner all "inside information" that relates to it, including all material changes to information that has previously been disclosed to the public.

  • "Inside information" generally means information that has not been made public, relating, directly or indirectly, to issuers of financial instruments which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments. One of the characteristics of the Japanese insider trading rules is that the inside information which will give rise to the prohibition of insider dealing is specified by the statute.
  • Article 166, Paragraph 2 of the FIEA defines the term "Material Facts" and lists out the events constituting Material Facts, the knowledge of which will trigger the prohibition on dealing in the relevant company's financial instruments. Those Material Facts can be categorized into the followings four groups:
    1. certain corporate actions decided by the decision-making body of a listed company or its subsidiaries, such as a merger, share swap, company split, transfer of shares with change in a subsidiary and business alliance;
    2. certain factual circumstances that occurred in a listed company or its subsidiaries, such as material damage caused by disaster or business operations, material litigation or change in the major shareholders;
    3. change in forecasts of sales, ordinary profits and net profits of a listed company or its subsidiaries; and
    4. general catch-all.

The general catch-all set out in (iv) above means any material facts other than those referred to in (i), (ii) and (iii) which have an important bearing on the management, business or property of a listed company or its subsidiaries and may have a material influence on the investment decisions of investors. It is up to the holder of inside information to determine if certain information qualifies as a Material Fact covered by the general catch-all. This will often be a difficult exercise, and a large gray area will exist as to whether certain events constitute a Material Fact or not.

  • Article 167 of the FIEA also stipulates that the knowledge of a tender offer or a buyout of 5% or more of the issuer's shares by others ("Tender Offer and Similar Accumulated Purchase") constitutes inside information, the knowledge of which will give rise to the prohibition on dealing in the relevant company's financial instruments.
  • Even if information falls under any of the above, if such information is deemed as having an insignificant impact on the investment decisions of investors pursuant to the standards set forth in the Cabinet Office Ordinance on Restrictions on Securities Transactions, etc. (Ordinance of the Ministry of Finance No. 59 of 8 August 2007), such information does not constitute a Material Fact.

6.2 Insider dealing regulations

The basic legal framework regarding insider dealing and market abuse under Japanese law is set forth in Article 166 and Article 167 of the FIEA.

Under Article 166, a person who becomes aware of a Material Fact (a "Corporate Insider") is prohibited from buying or selling the financial instruments of the issuer before such information becomes publicly available by the issuer through a public announcement.

Similarly, under Article 167, a person who becomes aware of a Tender Offer and Similar Accumulated Purchase contemplated by others (a "Tender Offer Insider") is prohibited from buying or selling the financial instruments of the relevant company unless:

  1. such information is disclosed by such competing bidder through a public announcement;
  2. the Tender Offer Insider discloses in its own tender offer announcement the information about the Tender Offer and Similar Accumulated Purchase contemplated by such competing bidder, including the name of the competing bidder, timing and certain other matters regarding such contemplated Tender Offer and Similar Accumulated Purchase; or
  3. six months have passed after the Tender Offer Insider was informed of such contemplated Tender Offer and Similar Accumulated Purchase.

6.3 In the event of a public tender offer

In the event that a bidder contemplating launching a tender offer obtains, during due diligence or by other means, information constituting a Material Fact in relation to the target, the bidder may not launch the tender offer before such Material Fact is disclosed by the target, otherwise the bidder, as a Corporate Insider, would violate the insider dealing regulations described above.

If this is the case, the bidder has no choice but to request the issuer to disclose such Material Fact before the launch of the tender offer.

6.4 Common anti-takeover defense mechanisms

The table below contains a summarized overview of the mechanisms that can be used by a target company as a defense against a takeover. Among the measures below, the most popular mechanism is the Advance Warning Type Rights Plan utilizing share options which have a discriminatory exercise condition attached that prevents the hostile bidder from exercising takeover rights. Please note however that as mentioned in 3.7 above, the number of listed companies introducing the Advance Warning Type Rights Plans has decreased after the introduction of the Corporate Governance Code.

Mechanism

Assessment and considerations

1. Advance Warning Type Rights Plan

An outline of the typical Advance Warning Type Rights Plan is as follows:

  • Advance warning is provided by target company disclosing the details of the rights plan;
  • When a hostile takeover is imminent from a party who holds or will hold more than a set percentage (usually 20%), in accordance with the advance warning, the target company will request the hostile bidder to provide the necessary information relating to the hostile bidder, the purpose of the takeover and the proposed management policies after the takeover;
  • The board of directors of the target company examines and analyzes the hostile takeover proposal according to the submitted information;
  • If the board of directors determines (in the case where an independent adviser is retained, its recommendation will be taken into account) that the hostile bidder triggers the defense measures, all shareholders are allocated new share options which have a discriminatory condition attached that prevents the hostile bidder from exercising the rights (the "Share Options with Discriminatory Terms"); and
  • All shareholders, other than the hostile bidder, acquire new shares at a price lower than the current market price, thereby diluting the share ownership ratio of the hostile bidder.
  • A pre-condition for the issuance of the Share Options with Discriminatory Terms under this type of plan is that the corporate value of the target company would be reduced if it were not for the issuance of the new share options under the plan.
  • The legality of an Advance Warning Type Rights Plan depends on::
    • the specific conditions surrounding the decision to issue the new share options;
    • the content of the new share options;
    • the issuance procedures; and
    • other individual circumstances.
  • Even if the plan on its face appears to be legal, upon implementation, the procedures must be properly carried out or the issuance of the new share options may be judged to be illegal.

2. Emergent Phase Rights Plan

The basic structure of this plan is the same as the typical Advance Warning Type Rights Plan with the following additional features:

  • usually introduced to deal with a hostile offer by a specific bidder or its affiliates ("Hostile Bidder Group");
  • introduced by board resolution but the defense measure can be invoked only if the plan is approved by a simple majority of the attending shareholders with voting rights and the bidder's offer is not withheld; and
  • the defense measure in many cases includes discriminatory conditions including, among others, that the target will acquire the issued share options from all of its shareholders but deliver (i) common shares to shareholders other than the Hostile Bidder Group; and (ii) another type of share option to the Hostile Bidder Group with different exercise conditions.
  • This counter measure can be introduced even after the target company becomes aware of the existence of a potential hostile bidder, however the courts are likely to use a stricter standard to decide the legality of this anti-takeover defense method compared to the Advance Warning Type Rights Plan.
  • In contrast to the Share Options with Discriminatory Terms, the share options used in the Emergent Phase Rights Plan are usually structured as follows:
    • the Hostile Bidder Group cannot exercise the share options (i.e., discriminatory exercise conditions); and
    • if the target acquires the share options from all of its shareholders: (i) common shares will be delivered to shareholders other than the Hostile Bidder Group; and (ii) another type of share option with different exercise conditions will be delivered to the Hostile Bidder Group (i.e., with discriminatory acquisition clauses), which the bidder can exercise to the extent it owns, after the exercise of share options, 20% (or such other percentage as specified) or less of the total voting rights.
  • Although, under the general principles of the Companies Act, the board of directors has authority to determine the allotment of share options, the approval of the shareholders' meeting is considered to be a requirement to make this method legal and valid given recent court rulings.

3. Issuance of new shares or share options by third party allotment

New shares or share options are issued at a discount prior to the takeover in favor of friendly person(s).

This method dilutes the shares owned by the party engaged in the takeover. The board of directors will approve the issue of new shares or share options to a third party.
  • For the board of directors to be able to issue the shares in this manner, without the necessity of a shareholders' resolution, the shares cannot be issued at a considerable discount.
  • It was traditionally considered that an issuance of new shares or share options was unfair, and therefore invalid, in cases where the primary purpose for issuing the new shares or share options was to dilute a shareholder's share ownership, i.e., no specific use for the target company of the funds being raised. However, the recent trend of court rulings illustrates that even if the purpose is to dilute a hostile bidder's share ownership, the court judges the fairness of the issuance by taking into consideration that the hostile bidder is an "abusive bidder" (akin to 'greenmailers') whose intention is to acquire the shares for its own benefit without due regard to the sound management of the target company.

4. Traditional "cross-shareholding" (mochiai) arrangement

In Japan, cross-shareholding traditionally refers to a mutual shareholding relationship through a network of companies on the mutual understanding that these shares are not to be traded. Such friendly shareholders within the network generally support the incumbent management from whom they earn business, rather than a hostile bidder.
  • Although traditional cross-shareholdings have been reduced significantly in recent years, they remain a strong barrier to prevent acquisition by a hostile bidder.

5. Veto rights for certain shareholders

The issuance of a class of shares with special veto rights (often referred to as 'golden shares') to a friendly shareholder.

These 'golden shares' include the right to veto resolutions at a company's general shareholders' meeting relating to significant matters such as the election and removal of directors.
  • The current stock exchange rules in Japan permit shares of this nature as long as they do not significantly infringe the interests of shareholders and investors.
  • These golden shares are permitted by the stock exchange only in cases where certain national policy reasons exist. To date, there has only been one listed company in Japan that had golden shares.