Shareholder activism and hostile M&A in Japan
April 2024 | TALKINGPOINT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
April 2024 Issue
FW discusses shareholder activism and hostile M&A in Japan with Ryuichi Shiomi, Masatsugu Nakajima, Risa Fukumoto and Yoichiro Goto at Anderson Mōri & Tomotsune.
FW: How would you describe the shareholder activism landscape in Japan? With Japan’s new generation of shareholders more willing to exercise their voting powers, what are the implications for Japanese companies – particularly family controlled businesses?
Shiomi: Shareholder activism in Japan has been growing year by year. The number of shareholder proposals submitted for shareholders’ meetings from July 2022 to June 2023 was about 120 – an increase of approximately 15 percent year over. According to Japan’s Corporate Governance Code, Japanese companies are required to analyse the reasons behind opposing votes against their proposals and to consider the need for shareholder-board dialogue, among other measures. It is safe to say that Japanese companies have subsequently had to pay considerably more attention to shareholder activism in Japan. Regarding family-controlled businesses, while those companies are likely to be managed by a family that owns a significant portion of shares, the Corporate Governance Code requires a board to appropriately deal with any conflict of interest that may arise between the company and its related parties, including parties active in management and controlling shareholders, such as founders.
FW: What changes are activists typically pushing for? Are you seeing any common themes in event- and target-driven activist campaigns?
Nakajima: Typical shareholder proposals request that companies increase dividends, allow buybacks of shares, appoint directors including independent directors and abolish anti-takeover measures. In addition, some proposals pertain to director remuneration, such as disclosure of remuneration, reducing remuneration and introducing remuneration clawback provisions. Other proposals concern environmental, social and governance (ESG)-related matters, including climate-related financial disclosures. Some hedge funds adopting event-driven and target-driven strategies invest in companies during a merger or acquisition, a spin-off or a distress event in order to seek excess returns. There are also cases where these funds hold a dialogue with invested companies regarding a merger or acquisition.
“It is important to explore alternatives to poison pills. Other options to consider include staggered boards, dual-class share structures and golden parachutes.”
FW: Could you highlight any landmark examples of shareholder activism in Japan which forced organisational change? To what extent are activists demanding greater management accountability?
Goto: At one recent shareholders meeting, shareholder proposals were resolved when the director candidates proposed by a fund were appointed and then constituted the majority of the board. In another instance, a dividend increase was resolved – in an amount four-times that of prior years – that had been proposed by a fund. Even in cases where the shareholder proposal was not ultimately resolved, companies adopted similar measures to those proposed by the shareholders, such as introducing clawback provisions, after the shareholders’ meeting had been held.
FW: Could you provide an overview of current takeover rules in Japan? How do they impact hostile M&A activity?
Nakajima: When acquiring control of a Japanese company, buyers are subject to various legislation. This includes the Financial Instruments and Exchange Act (FIEA), as well as rules that interpret the FIEA, such as the obligatory tender offer rule which is triggered, for example, when more than one third of share certificates are purchased outside the market. There is also the obligatory purchase of the tendered shares rule, which is applied when an entity acquires two thirds or more of a company’s shares and other similar rights as a result of a tender offer. There are also guidelines for target companies in the event of a hostile takeover, drafted by the Ministry for Economy, Trade and Industry.
“Shareholder activism in Japan has historically been less prominent than in the US and UK, but has gradually gained momentum in recent years.”
FW: How important is it for Japanese companies to evaluate their vulnerability to a hostile approach? What aspects of their organisation do they need to assess in this regard?
Fukumoto: Evaluating vulnerability to a hostile approach is important for Japanese companies operating in a competitive and potentially contentious global market. Japan’s economy, like many others, faces various challenges, such as international competition, economic fluctuations, cyber security threats, geopolitical tensions and changing regulations. Therefore, understanding how vulnerable companies are to a hostile approach, as well as mitigating legal risks, is crucial for corporate sustainability and success.
FW: What advice would you offer to companies on developing poison pill and other takeover defences moving forward?
Nakajima: Companies should continue to closely monitor the trend of court cases concerning poison pills. However, it is important to explore alternatives to poison pills. Other options to consider include staggered boards, dual-class share structures and golden parachutes.
FW: Looking ahead, how is shareholder activism in Japan likely to evolve? What trends are set to shape this space?
Shiomi: Shareholder activism in Japan has historically been less prominent than in the US and UK, but has gradually gained momentum in recent years. Looking ahead, several trends are likely to shape the evolution of shareholder activism in Japan. First, increasing levels of institutional investor engagement. Second, a greater focus on corporate governance reforms. Third, a rise in foreign activist investors. Fourth, an increasing emphasis on ESG factors. Fifth, advancing technological innovation and digitalisation. Sixth, an extended focus on capital efficiency and shareholder returns. Seventh, a more collaborative engagement approach. And lastly, ongoing legal and regulatory developments. Overall, shareholder activism in Japan will continue to evolve as investors, both domestic and foreign, exert greater influence on corporate governance practices and strategic decision making. Trends suggest a growing emphasis on ESG considerations and value creation. This signals a potentially transformative period for Japanese companies and their stakeholders.
Ryuichi Shiomi is a partner and attorney at law at Anderson Mori & Tomotsune. His practice areas include M&A, business restructuring, joint ventures, business alliances, venture capital, private equity and funds, hostile takeovers and cross-border M&A. He graduated with an LLM degree (Harlan Fiske Stone Scholar) from Columbia Law School and is admitted as a lawyer in Japan and New York. He was Chambers’ Thought Leader for 2022. He can be contacted on +81 (3) 6775 1232 or by email: ryuichi.shiomi@amt-law.com.
Masatsugu Nakajima is a partner at Anderson Mori & Tomotsune. He has a wide range of experience in M&A, corporate and securities law and tax law. He has undertaken a wide range of tax work relating to stamp duty, income tax, corporate tax, inheritance tax and consumption tax. He graduated with an LLM degree from University of California, Los Angeles School of Law and is admitted as a lawyer in Japan and New York. He can be contacted on +81 (3) 6775 1227 or by email: masatsugu.nakajima@amt-law.com.
Risa Fukumoto is an associate at Anderson Mori & Tomotsune. She has a wide range of experience in finance and M&A transactions. She graduated from Hitotsubashi Law School and is admitted as a lawyer in Japan. She can be contacted on +81 (3) 6775 1766 or by email: risa.fukumoto@amt-law.com.
Yoichiro Goto is an associate at Anderson Mori & Tomotsune. He specialises in finance and financial regulations. He graduated from Cornell University, SC Johnson College of Business with master of business administration with distinction. He can be contacted on +81 (3) 6775 1856 or by email: yoichiro.goto@amt-law.com.
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