[ Nippon Keidanren ] [ Policy ]
Further Revision of M&A Legislation is Needed
December 12, 2006
I. Need for Revision of M&A Legislation
- The Company Law was enacted in May 2006 and the Financial Products Transaction Law will come into force in summer 2007. But legal means to block M&As that are detrimental to corporate value or that harm the national interest through the outflow of technology still fall far short of those in Europe or the US. There are also inadequacies in shareholder protection.
- If greater flexibility in compensation for mergers is allowed, the path will be open for foreign companies to acquire Japanese companies as fully owned subsidiaries without using cash, thereby encouraging hostile acquisitions.
- Careful review is needed not only of the Enforcement Regulations for the Company Law, but also of the entire legal system relating to M&As, in order to enhance any necessary legal provisions.
II. Current M&A Legal Systems in Europe and the US
- Powerful defensive measures against acquisitions such as a "poison pill" can be adopted and put into motion only by the decision of boards of directors.
- Measures are taken in the laws and regulations of many states to regulate inappropriate M&As, such as legislation or regulations for business combinations, which restricts hostile acquirers from initiating mergers.
- When using shares as compensation in a merger or acquisition, the same filing and disclosure obligations are required as for US-listed firms. As a result, SEC-registered shares are used as merger or acquisition compensation in most cases.
- There are also the Exon-Florio provisions that comprehensively regulate the acquisition of domestic companies by overseas investors from the perspective of national defense and economic security.
- There is no system of triangular mergers. The takeover bid is used in cross-border M&As.
- In a takeover bid, there is a strict obligation for a full purchase.
- In order to fully own a company against the will of minority shareholders, an acquirer must obtain between 90% and 95% of shares in the target.
III. Prompt Provision of M&A Legal System
Legislative Provision from the Perspectives of Shareholder Protection and Preventing M&As that Undermine Corporate Value
- 1. Strengthening Rules for Greater Flexibility in Compensation for Mergers
To tighten the requirements for the resolution of a merger with compensation other than cash or negotiable securities of Japan-listed firm (or equivalent negotiable securities that meet Japanese listing standards). A possible treatment is to obligate a strict resolution (two-thirds of voting rights and that of more than half shareholders).
To enhance disclosure and accountability of executive officers.
- 2. Establishing Legislation on Regulations for Business Combinations
To restrict mergers by hostile acquirers, as under US state laws.
- 3. Revision of Takeover Bid System
To require acquirers to offer shareholders the option of cash, as in Europe, when compensation in a takeover bid is other than cash or negotiable securities of a Japan-listed firm.
- 4. Revision of Listing Regulations
To allow diverse classes of shares and the use of various defensive measures.
Legislative Provision from the Perspective of Preventing the Outflow of Technology Related to National Security
- 5. Strengthening of Foreign Exchange and Foreign Trade Control Law, etc.
Review promptly the scope of the production and technological areas that need to be subject to the regulation.
Legislative Provision in the Taxation System Relating to Corporate Reorganization from the Perspective of Fairness
- 6. Maintenance of Tax Qualification Requirements
To maintain the current tax system, and not to allow tax deferments related to paper companies.
(Furthermore, in order to encourage direct investment in Japan, the comprehensive establishment of an attractive business environment through radical reforms to corporate taxation, including the lowering of the effective tax rate, is most important.)
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