M&A rules and practices in Japan share commonalities with corresponding rules in other developed markets but there are also significant differences in detail which can impact M&A startegy. This post is part of a series that aims to to be a practical introduction for professionals familiar with M&A concepts but new to the Japanese market.
What is a Takeover Bid (TOB/ 公開買付け – kōkai kaitsuke) in the Japanese Context?
At its heart, a Japanese TOB is a regulated procedure for acquiring shares in a listed company (or similar entity) directly from its existing shareholders. The primary goal is typically to gain control or significant influence. This is usually achieved by offering cash or stock consideration at a price that includes a “control premium” – an amount above the target company’s prevailing market stock price.
This premium serves multiple functions: it incentivizes shareholders to tender their shares, reflects the strategic value the acquirer places on controlling the target and, mediated by price, can be viewed as a way to distribute a portion of the anticipated synergies from the acquisition back to the target’s original owners.
Japanese TOBs and Price to Book Ratios
Opportunities in the Japanese M&A market are increasingly commanding attention. One notable facto is the low Price-to-Book Ratios (PBRs) of many Japanese listed companies compared to their Western peers. As highlighted by the Ministry of Economy, Trade and Industry (METI), a substantial portion of companies on the Tokyo Stock Exchange have historically traded below their net asset value.
Key Features: What Makes Japan’s TOB System Distinct
While Japan’s system drew early inspiration from the US, several features differ significantly from US and European practice. Grasping these distinctions early is vital:
Mandatory TOBs and Exceptions Japan has rules requiring a TOB when certain ownership thresholds are crossed (in particular when exceeding 5% or 1/3rd ownership through off-market purchases under specific conditions). However, a key difference from most systems is that purchases made directly on the specified stock markets generally do not trigger these mandatory TOB requirements.
Partial Offers are Permitted and Practiced: Unlike jurisdictions where crossing a threshold (like 30% in the UK/Germany) automatically triggers an obligation to bid for all shares, Japan’s threshold for this “mandatory full offer” is much higher – typically requiring the bidder to aim for two-thirds (2/3rds) or more ownership post-TOB. This makes partial tender offers, seeking significant influence or control below that 2/3rds level, a perfectly viable and historically utilized strategy.
No Minimum Price Rule (Discount TOBs Possible): There’s no general regulatory floor for the TOB offer price. This means “discount TOBs” (offers below the current market price) are technically permissible, often used in specific scenarios like acquiring shares from a particular large holder, though they raise their own set of considerations.
Relatively Lower Squeeze-Out Threshold: After a successful TOB, achieving 100% ownership by buying out remaining minority shareholders (a squeeze-out) can often be accomplished if the bidder holds two-thirds (2/3rds) or more of the voting rights, allowing them to pass the required special resolution. This threshold is lower than the typical 90% or 95% requirements seen in many other major markets.
Limited Post-Bid Minority Rights: Following the conclusion of a TOB, remaining minority shareholders in Japan generally do not have automatic statutory rights to compel the acquirer to buy their shares at the TOB price (a “sell-out right”) or benefit from a mandatory extended acceptance period, unlike provisions found in the UK and Germany.
Unique Stance on Defenses and Director Duties: In hostile or competing bid situations, target company directors in Japan are not bound by a strict duty of neutrality (as in the UK/Germany). While takeover defenses are permitted, their use is often checked by an emphasis on shareholder approval. Furthermore, directors don’t face a strict legal duty to achieve the absolute highest price (like the US “Revlon duty”), operating instead under a more nuanced (and sometimes debated) standard related to ensuring a “fair value transfer.”
In common with TOB rules in other countries, the Japanese TOB system aims to facilitate M&A while ensuring adequate protection for minority shareholders. The system’s design and ongoing practical interpretations (including influential guidelines from METI) attempt to strike this balance.