The Tokyo High Court ruled Wednesday that struggling UFJ Holdings Inc. and the larger Mitsubishi Tokyo Financial Group Inc. can hold merger talks to create what would be the world’s largest bank in terms of assets.

The decision marks an about-face from the Tokyo District Court’s order July 27 banning UFJ from including its trust business in talks with Mitsubishi Tokyo as it had earlier agreed to sell UFJ Trust Bank to Sumitomo Trust & Banking Co.

Sumitomo Trust said it would immediately appeal to the Supreme Court.

Following the high court’s decision, UFJ and MTFG said they hope to conclude a basic agreement as early as Thursday to team up, including their trust bank units, by October 2005.

Candidate names for the envisioned banking group, which would boast 190 trillion yen in assets, include Mitsubishi UFJ Holdings, according to spokesmen of both banks.

In rejecting the lower court decision, Tokyo High Court presiding Judge Kazuyoshi Harada said that because the UFJ-Sumitomo Trust relationship of mutual trust has been destroyed, neither side can continue with trust merger talks in a sincere manner.

The relationship has been worsened by UFJ’s announcement that it plans to scrap its May 21 agreement with Sumitomo Trust as well as Sumitomo Trust’s request for a court injunction to halt the UFJ-MTFG talks.

The judge said that although the UFJ-Sumitomo Trust agreement is legally binding, Sumitomo Trust’s request for an injunction can no longer stand.

Sumitomo Trust criticized the decision, saying it is “extremely unjust as it violates constitutional rights, including the right of access to the court.”

The high court order may soothe lingering worries over the fate of UFJ, the weakest of the country’s four mega banks, some experts said.

“The court battle has raised worries that it would slow down the speed of UFJ-MTFG negotiations. But today’s news wiped out that concern, although some other uncertainties remain,” said Nozomu Kunishige, a bank analyst at BNP Paribas Securities (Japan) Ltd.

Meanwhile, Sumitomo Mitsui Financial Group Inc., which has offered a counterproposal to merge with UFJ, remains eager.

“We are not a party concerned with the litigation, and our group will continue to propose the offer,” said Takashi Morita, a Sumitomo Mitsui spokesman.

SMFG officially disclosed its proposal to the media Wednesday. It mailed the proposal Friday to UFJ, which answered Monday that it would consider it, although there was no change in its plan to forge an alliance with MTFG.

SMFG is ready to provide a capital increase of more than 500 billion yen for a merger, countering an MTFG bid.

The proposal also calls for establishing a joint holding company by early April, and combining their bank units by October. SMFG estimates the merger would save about 200 billion yen a year by restructuring their branch networks and reducing their system costs.

SMFG’s disclosure — unusual for a merger proposal — is apparently aimed at garnering support from UFJ’s shareholders and employees by emphasizing the merits of a merger with SMFG.

UFJ and MTFG announced the signing of a memorandum of understanding July 16 to launch talks with the aim of integrating their operations during the first half of fiscal 2005. UFJ also said it had scrapped its agreement with Sumitomo Trust to sell its trust unit.

Sumitomo Trust filed for a court injunction, calling the unilateral cancellation of the trust unit transaction a breach of contract.

The Tokyo District Court issued the injunction July 27, which blocked the two groups’ merger talks.

UFJ said Friday it posted a net loss of 91.6 billion yen in the April-June quarter, citing rising credit costs and additional writeoffs and provisions for bad loans.

Information from Kyodo added

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