The Japanese TOB framework, while incorporating elements US or
European M&A practicioners will be familair with, exhibits distinct
characteristics in several important areas that reflect the historical
and commercial concerns of the country.
It is helpful to compare the approaches taken by Japan to those of
other countries on issues common to all TOBs. Below we consider some of
the issues and look at examples of how the US, UK and Germanty approach
the issue compared with Japan.
Mandatory TOB
Regulation (Triggering Events)
-
Japan: A TOB is generally mandated for certain
off-market acquisitions exceeding 5% ownership (subject to
exceptions, like acquiring from 10 or fewer persons within 61 days) or
exceeding a one-third ownership threshold. Critically, acquisitions made
directly on the stock exchange market are typically exempt from
these mandatory triggers. This exemption will be discussed further in a
later post. -
US: No explicit statutory rule mandates a TOB for share
acquisitions. The applicability of TOB regulations depends on broader
criteria and case law interpretation rather than fixed percentage
thresholds for triggering a mandatory offer. -
UK & Germany: Mandatory TOB is triggered upon acquiring 30%
or more of the voting rights (either crossing the threshold or, in the
UK, for existing 30-50% holders acquiring additional rights). This
applies regardless of whether the acquisition is on-market or
off-market. -
Key Difference: Japan’s specific thresholds combined with the
exclusion of on-market trades create a distinct regulatory perimeter
compared to both the US and the EU models.
Mandatory Full Offer
Obligation
-
Japan: An obligation to offer to purchase all remaining
shares (or solicit tenders for all shares) arises only when the TOB
would result in the bidder holding two-thirds (2/3rds) or
more of the voting rights post-acquisition. -
US: No statutory mandatory full offer obligation exists. Partial
offers are legally permissible, although market practice and
considerations related to fiduciary duties towards remaining minority
shareholders often lead bidders aiming for control to make full
offers. -
UK & Germany: Upon triggering a mandatory TOB (at the 30%
threshold), the bidder is generally obligated to make an offer for
all outstanding shares. Partial bids are typically not
permitted in the context of a mandatory offer, nor can acceptance
conditions generally be set above 50% (UK) or have upper/lower limits
(Germany). -
Key Difference: Japan’s significantly higher threshold (2/3rds
vs. 30%) allows for a broader range of control-seeking partial offers
without triggering the full offer obligation.
Minimum Price Regulation
-
Japan (also US): No general statutory minimum price regulation
exists for TOB offers. This allows for offer prices potentially below
the prevailing market price (“discount TOBs”) under certain
circumstances. -
UK & Germany: Regulations impose minimum price rules.
Generally, the offer price must be at least the highest price paid by
the bidder for target shares within a preceding period (12 months in the
UK, 6 months in Germany). Germany also considers the 3-month weighted
average market price. -
Key Difference: The absence of minimum price rules in Japan
provides flexibility but also necessitates scrutiny regarding fairness,
particularly in situations potentially involving coercion or conflicts
of interest. (Note: Japanese case law and practice influence pricing in
two-step squeeze-outs, often resulting in the second-step price matching
the TOB price).
Post-TOB
Minority Rights (Additional Acceptance Period / Sell-Out Rights)
-
Japan (also US): No general statutory obligation exists for
bidders to provide an additional acceptance period after a TOB becomes
unconditional, nor do remaining minority shareholders possess a general
statutory right to compel the bidder to acquire their shares at the
offer price (“sell-out right”). -
UK & Germany: Regulations typically require an additional
acceptance period (e.g., at least 14 days in the UK) after the offer
becomes unconditional. Furthermore, minority shareholders are granted
sell-out rights under certain conditions (e.g., bidder reaching 90% in
the UK, or 95% / mandatory bid context in Germany). -
Key Difference: The absence of these post-bid mechanisms
in Japan places greater emphasis on shareholders’ decisions during the
initial offer period.
Squeeze-Out Requirements
-
Japan: A squeeze-out can typically be effected through a special
shareholder resolution requiring two-thirds (2/3rds)
approval (which a bidder holding that stake can achieve). Alternatively,
holding 90% or more allows a squeeze-out via a demand
procedure without a shareholder vote. -
US: While state laws vary (Delaware being prominent), achieving
90% ownership often allows for a simplified “short-form merger” without
a shareholder vote. Squeeze-outs below this threshold are possible but
subject to stricter judicial scrutiny regarding fairness to minority
shareholders (entire fairness standard). -
UK & Germany: Require higher thresholds for statutory
squeeze-out rights, typically 90% (UK) or 95% (Germany) of shares/voting
rights acquired, often linked to the success of the TOB. -
Key Difference: Japan’s relatively lower 2/3rds threshold for
achieving a squeeze-out via shareholder resolution presents a more
accessible path to full ownership compared to the higher percentage
requirements or stricter fairness reviews seen elsewhere.
Takeover Defenses and
Board Neutrality
-
Japan & US: Target company boards are not bound by a strict
duty of neutrality in the face of a takeover bid. They can implement
defensive measures, subject to varying degrees of judicial review (Japan
emphasizes shareholder intent/approval for potent defenses; US employs
standards like the Unocal test focusing on threat and
proportionality). -
UK & Germany: Target boards generally operate under a “duty
of neutrality.” They must refrain from taking actions that could
frustrate an offer without shareholder approval once a bid is announced
or imminent. -
Key Difference: The ability of Japanese boards to engage in
defensive tactics (albeit with checks) contrasts sharply with the
neutrality principle embedded in UK/German regulations.
Director Conduct in
Competing Bids
-
Japan: No strict equivalent to the US “Revlon duty” (requiring
directors to maximize shareholder value, typically by achieving the best
price reasonably available in a sale context). Japanese courts reference
a “duty regarding fair value transfer,” but its precise requirements,
especially regarding auctioning or price maximization, remain less
defined than in the US. -
US: The Revlon duty imposes significant obligations on directors
when a company sale becomes inevitable. -
UK & Germany: While directors must act in the company’s best
interests, there is generally no specific legal obligation analogous to
Revlon to actively solicit competing bids or auction the company, though
rules exist regarding equal information provision to competing bidders
(UK). -
Key Difference: The conduct required of Japanese directors in
competitive bid scenarios is less prescriptive regarding price
maximization compared to the US standard.
Conclusion
This comparison highlights that Japan’s TOB system is a distinct
construct, differing significantly from US and European models. Key
differentiating factors include the treatment of on-market purchases,
the threshold for mandatory full offers, the absence of minimum price
rules, the lower thresholds for squeeze-outs, and the specific
approaches to takeover defenses and director duties. These variations
have substantial practical implications for structuring acquisitions,
advising target companies, and protecting shareholder interests within
the Japanese market.
