Understanding Japan’s Takeover Bid System: A Comparative Perspective

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.