As Japan gives more say to investors, companies are clinging to a tool that has the opposite effect.
Poison pills, a way to scupper hostile takeovers, are in place for at least 20 percent of firms in the benchmark Topix index. That compares with at least 5.8 percent for Wall Street’s Standard & Poor’s 500 Index.
Prime Minister Shinzo Abe is seeking to instill more market discipline on Japan’s companies by making management more accountable to investors. The lingering prevalence of defense measures suggests a reluctance in the nation’s boardrooms to buy into the premier’s plans. For Institutional Shareholder Services Inc., the pills are also unnecessary.
“Hostile takeovers in Japan are like plane crashes. They hardly ever happen,” said Takeyuki Ishida, head of Japan research at the proxy adviser. “Yet Japanese corporations are afraid and want to protect themselves.”
Poison pills typically give stock owners the right to buy more shares to dilute the holdings of an acquirer. They were introduced to Japan by Nireco Corp. in 2005, when directors of the maker of measuring instruments approved a takeover defense plan that was later blocked by a court.
Since that year, there have been 29 attempts to purchase Japanese companies without management consent, and just five were successful, according to Tokyo-based Recof Data Corp., which compiles takeover figures.
The defense measure grew in popularity, partly amid fear of outspoken activists from home and abroad, such as Steel Partners and Yoshiaki Murakami. By August 2008, the year after Steel Partners failed in its bid to take over Bull-Dog Sauce Co., 574 companies had poison pills, Daiwa Institute of Research Ltd. data show.
Seven firms adopted one for the first time in the year ended June, according to Daiwa.
“They serve to protect lower-quality companies,” said Tatsushi Maeno, head of Japanese equities at Pinebridge Investments Japan Co. in Tokyo.
The prevalence of the measures is also partly down to inertia. Some firms renew takeover defenses when their terms end because it’s easier than dropping them, ISS’s Ishida says. Companies are also reluctant to let go because once a defense is relinquished, it’s difficult to bring them back, said Hiroyuki Nagamatsu, an M&A adviser at Deloitte Tohmatsu Financial Advisory LLC in Tokyo.
Others, such as Capcom Co., are designing more sophisticated pills that pass proxy advisers’ strict standards. While ISS opposes 99 percent of takeover plans every year, it approved the game-maker’s proposal, saying it didn’t see it as a case of underperforming management trying to protect itself.
In the U.S., “half the time they’re used to get more money out of the acquirer,” said Nicholas Benes, representative director of the Board Director Training Institute of Japan. In Japan, management use them just to say no, he says.
The pills go against the nation’s attempts to make Japanese executives accountable in the market for their performance, according to Deloitte’s Nagamatsu. The corporate governance code, started in June, requires firms to justify the economic rationale for keeping cross-shareholdings, another protection against takeovers, in a bid to stop the practice in Japan. A stewardship code calls on shareholders to press companies to boost returns.
“Adding these pills doesn’t go down well with investors,” said Nagamatsu. “Ultimately, if stocks keep rising, that’s the best form of defense. Poison pills are a sign management lack confidence.”