Analysis: A court battle raises the question - how far will Japan swallow poison pills?

Shibaura Machine

25/10/2021 12:12

(Updates Oct 21 story to add details on QuestHub and University
of Tokyo's Tanaka, paras 11, 21)
    By Makiko Yamazaki
    TOKYO, Oct 25 (Reuters) - The fate of future hostile
takeover bids in Japan could rest on an upcoming court ruling
that will decide whether the country's top maker of newspaper
printing presses can move forward with a poison pill against an
unwelcome shareholder.
     At issue is whether 105-year-old Tokyo Kikai Seisakusho Ltd
 6335.T  will be allowed to not count votes from Asia
Development Capital (ADC)  9318.T  - an investment firm that
built up most of its 40% stake in a matter of weeks - when
shareholders vote on issuing new stock that would dilute ADC's
ownership.
    A holding of more than 33% in Japan gives the stakeholder
veto rights over important board decisions and sometimes de
facto control.
    ADC has sought an injunction and the Tokyo District Court's
ruling - the first one to look at an attempt to exclude an
investor from a shareholder vote on a poison pill - is expected
sometime in the next week. A victory for Tokyo Kikai holds the
potential to make it much easier for other Japanese companies to
use poison pills. 
    Tokyo Kikai, which has said ADC hurts its corporate value, 
will put the poison pill plan to a shareholder vote at an
extraordinary general meeting on Friday.
    The battle highlights both a rise in hostile takeovers in
Japan over the past few years as the practice - once considered
the domain of unscrupulous corporate raiders - loses its stigma
as well as what some experts see as inadequate Japanese takeover
rules that leave companies, small ones especially, too
defenceless.
    It also comes at a time when investors are watching to see
if a drive by Japan's new prime minister, Fumio Kishida, to roll
back some of the pro-market policies of former premier Shinzo
Abe will impact corporate governance.
    Corporate governance experts say it is too difficult to call
which way the court might rule.
    On one hand, ADC's argument that a ruling in Tokyo Kikai's
favour would fly in the face of shareholder equality is a strong
one as the principle is enshrined in Japanese corporate law,
they say.
    "If a target company can select who is allowed to vote on a
poison pill, it will come up with all kinds of excuses to create
a list of eligible shareholders who have the best chance of
passing the pill," said Takumi Watanabe, executive officer at
proxy advisory firm QuestHub.
    QuestHub said it is not involved in the transaction.
    But governance experts add the court might decide that ADC
counts as an "abusive buyer" that could threaten the rights of
minority shareholders, having rapidly built up its stake and not
presented the company or other shareholders with a new
management plan.
        
    IT WOULDN'T HAPPEN OVERSEAS
    Nearly a decade ago, more than 500 Japanese firms had a
permanent poison pill, typically part of their company's
articles of incorporation. But the practice - oft criticised for
entrenching bad management - fell out of favour after corporate
governance reforms pushed by Abe required institutional
investors to disclose how they voted on agenda items at
shareholder meetings, including poison pills.    
    A poison pill that targets a specific bidder - called an
emergency poison pill in Japan - was first successfully employed
last year by Toshiba Machine, renamed Shibaura Machine  6104.T ,
in its fight against prominent activist investor Yoshiaki
Murakami.
    Since then at least five other firms including Tokyo Kikai
have either introduced them or sought to introduce them. Among
them, Shinsei Bank  8303.T  plans to seek shareholder approval https://www.reuters.com/business/shinsei-bank-plans-poison-pill-defence-against-sbis-11-bln-bid-sources-2021-09-17
 for a poison pill to thwart online financial conglomerate SBI
Holdings'  8473.T  $1.1 billion bid. 
    Experts say the current wave of poison pill activity
underscores a lack of clarity over what Japanese companies can
do to block takeover bids.
    They note Japanese small cap firms are particularly
vulnerable to aggressive stake-building from unwelcome
stakeholders. Tokyo Kikai, for example, has a market value of
just 15 billion yen ($130 million).
    Unlike the United States, Japanese company boards cannot
swiftly adopt a poison pill to ward off a hostile suitor. Though
not explicitly written in law, court precedents have led them to
believe they must seek shareholder approval before adopting a
poison pill - a time-consuming process.
    In Europe, tender offers are usually mandatory for
acquisitions of stakes beyond a certain threshold - 30% in the
UK - a rule that would prevent cases like Tokyo Kikai's.
    Wataru Tanaka, a corporate law professor at the University
of Tokyo who submitted a letter of opinion to the court on
behalf of Tokyo Kikai, believes the government should prioritise
fixing the country's takeover rules.
    "Poison pills are a second-best solution," he said.     
($1 = 114.3800 yen)

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GRAPHIC: Number of firms with anti-takeover measures in Japan   
https://tmsnrt.rs/3E3G2M3
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 (Reporting by Makiko Yamazaki; Additional Reporting by Yuki
Nitta; Editing by David Dolan, Edwina Gibbs and Raju
Gopalakrishnan)
 ((Makiko.Yamazaki@thomsonreuters.com; +81-3-4563-2805;))