Thanks to the recent high-profile battle between Fuji Television Network Inc. and Internet service provider Livedoor Co. over control of Nippon Broadcasting System Inc., the phrase “poison pill” has become a household word even in Japan.
A poison pill is a defensive measure a company takes to make it less attractive for acquisition during a hostile-takeover attempt. The measure may include issuing new shares to existing shareholders to dilute the accumulated stake of a hostile bidder. The lesson from the Fuji-Livedoor battle has prompted many companies to consider whether to use a poison pill.
Even Toyota Motor Corp., whose massive aggregate market value makes it an unlikely target of any hostile-takeover bid, is reported to have considered various defensive measures.
In March, Nireco Co., a maker of high-tech measuring devices and controllers, became the nation’s first company to adopt a poison pill tactic. But on June 1 the Tokyo District Court issued a provisional injunction blocking the measure, and then confirmed the order on June 9. The request for the injunction had been filed by SFP Value Realization Master Fund Ltd., a Cayman Island-based investment company that owned 6.8 percent of Nireco’s shares as of May 9.
Although Nireco has appealed the June 9 decision to the Tokyo High Court, the lower court decision apparently has poured cold water on company executives’ efforts to find creative ways to fend off hostile takeovers. They will have to live through a period of trial and error.
Nireco’s poison pill drew much attention. On March 14, Nireco’s board had endorsed the issuance of share warrants to dilute stock in case of a hostile-takeover attempt. Specifically, the measure would offer all shareholders registered as of March 31 the opportunity to buy two new shares for each one they already owned for 1 yen each in the event that a perceived aggressor bought 20 percent of Nireco shares.
In filing its injunction request, SFP asserted that the sudden threefold increase in the number of Nireco shares could cause the share price to plunge and result in large losses for shareholders. The court focused on the following points: Did Nireco’s poison pill tactic contain a mechanism that would reflect the will of shareholders expressed at a future meeting? Did it also contain a mechanism that prevented Nireco’s board from deciding arbitrarily to activate the poison pill?
Finding that Nireco failed both tests, the court decided that the poison pill tactic was unfair because it could cause unforeseen financial losses to existing shareholders.
In accordance with the guidelines issued jointly May 27 by the Ministry of Economy, Trade and Industry and by the Justice Ministry concerning defense plans to fight off hostile-takeover bids, the court apparently attaches importance to the interest of existing shareholders and seeks to lay down strict conditions for activating a poison pill. It appears to want to put the brakes on excessive defensive measures.
The message from the guidelines and the court decision seems to be that authorities will not accept defensive measures ostensibly aimed at protecting executives’ jobs. Thus the view is spreading even among executives that there is no need to hurriedly introduce such measures that risk violating the rights of existing shareholders.
Some companies are considering leaving the decision on whether to activate a defense mechanism against hostile-takeover bids to outside board members, to prevent the mechanism from appearing only as a measure to serve the interest of executives. The problem for a company, though, is finding truly independent outside people who can properly decide, as board members, when a proposal for a takeover is a constructive one that could really increase corporate value.
As for the introduction of a poison pill, there is also a technical question related to Japanese tax law. Authorities are said to be inclined to further tax shareholders who acquire new shares by exercising warrant rights. If the fear of additional taxes were to inhibit issuing share warrants, the poison pill would not function as expected.
There is a view that, until the tax question is settled, it will be difficult for companies to introduce poison pills. So far, there have been no cases in which a Japanese company equipped with a poison pill has become a target of a hostile takeover. Each company will need to accumulate experience to decide what type of defensive measure against a hostile-takeover bid is most appropriate. The bottom line is that defensive measures should not be used as tools merely to maintain the interest of existing executives. And such measures should not be used to block a constructive proposal from new bidders.
In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.