Legislative efforts in Japan to facilitate M&A – accelerated squeeze out and share exchange offer
Takeshi Komatsu
Mori Hamada & Matsumoto
Tokyo
Takeshi Komatsu (Bio)
The Japanese Companies Act (the Companies Act) came into effect on May 1 2006. Last year, only four years after the implementation of this relatively new law, the Ministry of Justice started to discuss the first amendment. The main focus of the discussion is the adoption of a group-wide corporate governance system (including the possible introduction of a 'double derivative' suit). However, it is also foreseeable that several parts of mergers and acquisitions provisions will be amended at the same time. Among other things, the adoption of a short-form squeeze out procedure and prevention of the abuse of appraisal rights are on the legislative agenda. The amendment of the Companies Act would come into force in 2013 at the earliest, if the legislative process goes smoothly.
In the meantime, the Ministry of Economy, Trade and Industry (METI) submitted an amendment bill to the Act on Special Measures for Industrial Revitalisation and Innovation (the METI Act) to Parliament in February 2011. One of the aims of the METI Act is to facilitate M&A activities in order to enhance the competitiveness of Japanese corporations in the global economy. For this purpose, the METI Act makes available an accelerated squeeze out procedure and share exchange offer if certain requirements are fulfilled, including obtaining an approval from the relevant Minister. The METI Act was passed by Parliament and became effective on July 1 2011.
Accelerated squeeze out
Since the implementation of the Companies Act, the use of the "class share subject to class-wide call", has been the most popular way to effect a squeeze out of minority shareholders for cash consideration in Japan, mainly for its legal and taxation stability. However, under the Companies Act, a squeeze out by way of class share requires (i) a shareholders general meeting to be convened to obtain super majority approval of the shareholders and (ii) approval of the court for the sale of the fractional shares. As a result, it takes four to six months in total to complete the squeezing out process after completion of the takeover bid (TOB) procedure when the target company is a listed company.
In order to shorten this time schedule and simplify the procedure, the METI Act stipulates that, when (i) a bidder obtains an approval from the relevant Minister for its TOB plan in advance and (ii) as a result of such TOB the bidder has acquired 90% or more of the voting rights in the target company, it may apply to effect a squeeze out of the remaining minority shareholders by way of "class share subject to class-wide call" without convening a general meeting of shareholders and obtaining court approval. Then, the relevant Minster may approve the squeeze out after assessing, among other things, whether the proposed amount of cash consideration for the minority shareholders is equivalent to the cash consideration in the previous TOB. A foreign enterprise is also able to benefit from this simplified procedure to obtain 100% of a Japanese listed company if approval is obtained. However, it should be noted that the accelerated procedure is only available under the METI Act to facilitate the approved TOB and squeeze-out and therefore should be completed within three months post the end of the approved TOB period.
As noted above, the introduction of a short-form squeeze out procedure is being discussed as part of the next amendment of the Companies Act. It is also possible in the future that a similar kind of short-form squeeze out will become available in Japan without the need to fulfil the particular requirements under the METI Act.
Share exchange offer
The METI Act also provides for several exemptions to the stock issuance rules of the Companies Act so that Japanese stock companies can use their own shares as consideration in connection with a TOB to acquire the shares of a listed company, rather than having to use cash consideration. To rely on these exemptions, it is necessary to fulfil certain requirements including obtaining (i) an approval from the relevant Minister for a business plan including share exchange offer and (ii) a super majority approval at a shareholders' general meeting if the number of the shares issued as TOB consideration is 20% or more of the total number of the issued shares of the acquirer. Without these exemptions, it was in practice fairly difficult for a Japanese stock company to carry out a share exchange offer under the Companies Act because of its rigid stock issuance rule despite the fact that the Financial Instruments and Exchange Act, which governs TOB, allowed for share exchange offers to be made. Therefore, under the METI Act, it is hoped that Japanese corporations will begin to launch a number of share exchange offers in Japan and overseas (the exemptions under the METI Act are also applicable when a Japanese stock company or its foreign subsidiary launches a share exchange offer for a foreign company).
However, it should be noted that there are no tax deferral benefits available for a share exchange offer; accordingly, this may in practice reduce the attraction of making a share exchange offer until the necessary tax deferral treatment becomes available. In addition, these provisions of the METI Act are irrelevant for a foreign company that wishes to launch a share exchange offer for a Japanese listed company, because the issuance of foreign shares as TOB consideration is subject to the relevant governing foreign law and the Japanese Financial Instruments and Exchange Act allows for the use of foreign stock as TOB consideration subject to fulfilling certain disclosure requirements. However, the tax deferral issue mentioned above still functions as a potential obstacle to a foreign company which launches a TOB of a Japanese listed company.