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When Internet services company Livedoor Co. announced its bid to acquire Nippon Broadcasting System Inc., the vulnerabilities of Japan’s capital markets were suddenly laid bare, prompting domestic companies to scramble for ways to defend themselves from hostile takeovers.

Two of the nation’s major oil wholesalers, for example, Nippon Oil Corp. and Cosmo Oil Co., have begun buying more shares in each other, following similar moves by major steel companies Nippon Steel Corp., Sumitomo Metal Industries Ltd. and Kobe Steel Ltd.

Cross-shareholding has long been seen as a symbol of the cozy ties shared by Japanese businesses and as a major factor behind the prolonged stagnancy of Japan’s economy. But the Livedoor-Nippon Broadcasting saga seems to have breathed new life into the hitherto declining practice.

“(Company management) should be making efforts to increase the value of their companies, but these moves make it seem as though the hands of the clock are moving in the opposite direction,” a senior Cabinet Office official said, criticizing the backwardly defensive moves.

The fact that Livedoor, a Japanese startup backed by Lehman Brothers Holdings Inc., had a chance to exert control over the Fujisankei Communications Group, the nation’s largest media conglomerate, means that large foreign enterprises with huge market value have a better chance of taking over Japanese companies, according to industry analysts.

Nippon Steel President Akio Mimura defended cross-held shares, saying they are meant “to prepare against potential threats.”

But critics point out that cross-shareholding allows management to evade its responsibility to the investors by taking cover under “silent shareholders,” which are usually large companies that can effectively shield them from the scrutiny of the market.

“We need a system that protects businesses when a wolf appears at the door,” Mitsuo Horiuchi, former chairman of the LDP’s Executive Council, said at a Liberal Democratic Party meeting on corporate governance in March.

In response to the “Livedoor shock,” the government and the ruling parties agreed to delay lifting a ban on “triangle mergers,” which allow the Japanese units of foreign companies to issue shares of their parent firms as compensation when merging with a Japanese firm. Lifting the ban would have made it easier for foreign enterprises to acquire Japanese enterprises.

They are also studying ways to further regulate takeover bids, including the use of poison pills, which are banned because they do not benefit shareholders.

Many enterprises are expected to propose similar defensive measures at their general shareholders’ meetings in June.

Analysts say many domestic firms that are now defenseless against takeovers will probably overreact to the Livedoor saga by arming themselves with measures that allow them to reject all offers — even those favorable to shareholders.

The issues being discussed “are defensive measures for management and crafted by management,” according to Tomomi Yano, managing director of the Pension Fund Association, an organization of corporate pensions.

In Europe and the United States, where mergers and acquisitions occur more frequently than in Japan, rules on such deals were forged by the clashing interests of management and shareholders.

“It is wishful thinking on the part of management to try to reap profits without experiencing any pain,” said Yoshiko Iwata, president of J-Eurus IR Co., which offers global consulting on investor relations.

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