In the weeks before the Corporate Law took effect Monday, Izumiya Co. announced measures to prevent hostile takeovers, expecting the law’s provisions to encourage mergers and acquisitions.
Even before the law debuted, a number of high-profile hostile takeover bids attracted media attention, including Livedoor Co.’s attempt to buy Nippon Broadcasting System Inc. and the effort to acquire Hanshin Electric Railway Co. by M&A Consulting Inc., an investment fund led by Yoshiaki Murakami.
Izumiya, a midsize supermarket chain based in Osaka, has come up with a poison pill to deter unwanted buyers. It would empower the company to give existing shareholders the right to acquire new shares if a corporate raider tries to buy more than 20 percent of the firm’s shares. If exercised, this defense would dilute the voting rights of a hostile bidder by as much as 50 percent.
“Massive purchases of shares without consultation or the consent of management of a targeted company have increased in recent years, amid changes in laws and in the corporate structure and investment environment in our country’s capital market,” Izumiya said in a statement announcing its takeover defenses.
“The company’s board of directors’ meeting is going to introduce such defense plans against acquisition with a view to the (new) Corporate Law (that took effect May 1), presupposing (the board) gains approval from a shareholders’ meeting to be held May 24.”
Although Izumiya’s takeover defenses have yet to be tested, experts say the new law will make it easier for firms to carry out M&As.
Worries about the effect of the legal changes run deep. In fact, fears that big firms, particularly foreign companies with large market capitalization, might be tempted to swallow smaller rivals in Japan have delayed the law’s M&A provisions until next May 1, to give companies time to develop takeover defenses.
Under the new law, a subsidiary of a foreign company, for example, will be able to use shares in its parent to acquire a Japanese firm — a so-called triangular merger involving the three parties.
“M&As will definitely increase since the law makes it easier for companies to carry out mergers from next year,” said certified public accountant Shinya Yamada, author of “Tsumamigui Shin-Kaishaho” (“Tasting of the New Corporate Law”).
“Right now, when one company takes over another, it is only allowed to offer its shares to shareholders of the target company,” Yamada said. “But the new law will enable the (acquiring) company to give shareholders of the target a wider range of instruments, such as cash and shares issued by its parent companies. Anything goes under the new law.”
At the same time, the new law will enable bigger companies to reorganize their operations more flexibly at the management’s own discretion, Yamada said.
Under the new rules, one company will be allowed to acquire another whose net assets are worth 20 percent or less than its own without shareholder approval.
The law also affects relationships between affiliated companies. A parent company that holds 90 percent of its affiliate’s shares can acquire the affiliate outright without a vote by the affiliate’s shareholders.
The new law attempts to assuage worries of an M&A free-for-all. Companies are now allowed to issue various types of stock, including “golden shares” designed to provide friendly shareholders with the right to veto mergers.
Experts point out, however, that there are restrictions on the issue of these special stocks because they can undermine the interests of shareholders if they are used to defend management.
“In theory, it is possible for a company to issue a greater variety of stocks to defend itself,” said lawyer Toru Nagasawa, who specializes in corporate judicial and M&A issues. “But in reality, it is difficult for a listed company to introduce such stocks as defensive measures because it will greatly affect the rights of existing shareholders.”
Such defenses could rob a company of the chance to improve its management and for its shareholders to enjoy a rise in the price of the company’s stock, Nagasawa said.
The Tokyo Stock Exchange has set strict conditions for companies to issue shares deemed a threat to the interests of shareholders.
“Therefore, the change does not mean the new Corporate Law enables (a company) to adopt an epoch-making defense plan, but rather (some) companies will find it easier to take over others,” Nagasawa said.
As long as management meets the expectations of shareholders, enhancing corporate value and promoting investor relations, share prices should rise and prevent a company from becoming a takeover target, he said.
The case of Hanshin Electric Railway is a prime example, according to Nakagawa. Because Hanshin neglected investor relations, the carrier was undervalued despite being well run. This exposed the railway to the takeover threat of the Murakami Fund, which found the price of Hanshin shares attractive.
“It is a very important duty for management to enhance corporate value, to thoroughly brief its investors and to attract sound shareholders who intend to hold the company’s shares for a long time,” Nakagawa said.
“The Corporate Law will offer an opportunity for management to change mind-sets and attach greater importance to enhancing corporate value and promoting investor relations to benefit shareholders, instead of defending a company for the sake of management’s own interests.”
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