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

Investors will warn the Japanese government this week that a planned revision to rules on anti-takeover defence risks giving companies stealth protections against hostile domestic bids, foreign buyers and shareholder activists.

The investors, who are wary of more protectionism in a market where takeovers of listed companies are rare and managements are often loath to prioritise investors, told the Financial Times that the composition of the Fair Acquisition Study Group set up to debate the new rules appeared strongly skewed against shareholders’ interests.

The group was set up last November and, in a narrow three-week window that ends this week, is inviting public comments. “We are preparing our comments with a sense of urgency and deep concern. While a lot of the proposals look reasonable, [the study group’s] members and advisers are from the camp that has traditionally been called in to thwart activists and hostile takeovers, and the fear is that these are the people shaping the rules,” said the head of one US-based fund that has been involved in multiple activist situations in Japan.

In addition to strong representation from Japan’s conservative business and academic establishments, the 17-member study group includes lawyers and investment bankers with specific expertise in fending-off unsolicited takeover bids and shareholder activist campaigns.

No foreigners sit on the panel, despite non-Japanese funds holding roughly a third of the Japanese stock market, and the only foreign fund represented is BlackRock — an institution whose historic voting patterns mean it is widely seen as supportive of Japanese management.

An official at the Ministry for Economy, Trade and Industry (Meti) involved in setting up the guidelines said that lawyers known for helping companies to adopt anti-takeover measures were deliberately asked to join the panel since the new rules would not work without their co-operation. “If we want to make sure to avoid the misuse of anti-takeover measures, we need to involve lawyers who are actively making use of these measures,” the official said.

Representatives of more than six global funds said that they had engaged lawyers and were preparing to submit public comments to Meti by the filing deadline on March 15.

The funds are concerned that the new guidelines could be used in an overly protectionist way and would give target companies an excuse to block an offer that is beneficial for shareholders, said one lawyer.

Masatoshi Kikuchi, chief equity strategist at Mizuho Securities, said that despite efforts by Meti to reduce the range of pre-emptive takeover measures and other “poison pill” strategies available to Japanese companies, there had been an increase in companies introducing target-specific anti-takeover schemes 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 since they do not cover the target-specific defences, which they believe should require shareholder approval before adoption.

Lawyers representing the funds said that their warnings this week would focus on three key areas in which they felt woolly language could allow management to bury potential bids. Their first concern centres on the proposal that, when considering a proposed M&A deal, the board should judge whether it would enhance the target’s “enterprise value” — a term vague enough to allow the board to block an offer it did not like even if it offered value to shareholders.

Meti’s consultation paper also proposes that if a company receives a “concrete” takeover proposal, management should make a preliminary analysis and have it reviewed by the board. Investors fear that managements could hold off from sharing information with board directors because the term “concrete” is not quantifiable.

Meti’s proposals also fail to make clear whether and when a target company should allow a potential buyer to conduct due diligence on non-public information. The volume of information publicly available is limited in Japan compared with other developed equity markets.

The concern, said one lawyer representing several funds, was that management members should not be encouraged to frustrate an offer by blocking a bidder from conducting due diligence.

According to Meti, the new guidelines were specifically aimed at preventing company management from hiding a “concrete” takeover offer from the board. The term would be specified after seeking public opinion but, for now, Meti considers a concrete bid to have an acquisition price and target date of acquisition.

“When Japanese companies carry out overseas acquisitions, they mostly do unsolicited bids. And yet they hesitate from making unsolicited offers in domestic deals because of reputational concerns. We want to change that,” the Meti official said.