[ Nippon Keidanren ] [ Policy ]

Reasonable Defense Measures
against Takeovers Detrimental to Corporate Value Are Needed

November 16, 2004

Nippon Keidanren
(Japan Business Federation)

Because of the need to facilitate the structural reform of the Japanese economy and reorganization of corporate resources, Nippon Keidanren (Japan Business Federation) has repeatedly urged Japanese policymakers to reform company law and taxation methods related to corporate restructuring. Our proposals have led to a number of amendments to company law and tax legislation. The Japanese government also established the Japan Investment Council in 1994, giving it the task of promoting foreign direct investment in Japan with a view to stimulating the Japanese economy. As a result, the cumulative amount of inward foreign direct investment has soundly increased. However, over the last few years we have seen the unwinding of cross-shareholding and a decline in the aggregate value of listed stocks caused by a slumping stock market. These negative factors, together with the lack of reasonable defense mechanisms, have led to growing fears of takeovers that would harm corporate value.

In the deliberations on modernizing the Commercial Code, it is expected that merging companies will be allowed to provide shareholders of the merged companies with their parent companies' stocks in exchange for the stocks of the merged companies (triangular mergers). Through such triangular mergers, a company could acquire a target company with a corporate culture totally different from that of the acquiring company by making a subsidiary merge with the target company. By providing the target company's shareholders with the acquiring company's stocks, instead of the merging company's stocks, the acquiring company can obtain 100 percent of the target company's stocks without paying any cash.

Under the above mentioned situation, it cannot be denied that there is a growing risk that buyers who make no long-term commitment to corporate operations would pursue short-term profit for themselves, thereby harming corporate value and causing detriment to shareholders, employees, local communities and other stakeholders.

These harmful takeovers would result in the break-up of human resources, and the splitting up and selling off of business operations, which would otherwise have created long-term profits. They would also lead to the end of beneficial labor practices, which could cause serious harm to the community. There are also fears that a buyer could instigate a hasty selling of stock, taking advantage of stockholders' lack of information. In extreme cases, loyal stockholders could be forced to purchase stocks bought by the buyer (green mail).

In the United States, a variety of defense measures, such as the so-called poison pill, have been established to inhibit takeovers detrimental to corporate value. These measures have been proven useful by a number of positive results. In Europe, too, companies can take a number of different actions against harmful takeovers.

In Japan, however, despite the 1996 statement by the Japan Investment Council that there was a need for a multi-faceted study on defense measures against takeovers detriment to corporate value, such reasonable defense measures have still not been established.

In order to ensure an equal footing with other countries, the Japanese government should promptly establish defense measures against takeovers damaging to corporate value, working in parallel with the modernization of the Commercial Code.

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