In Japan, resistance to hostile takeovers fades

Attitudes are shifting, thanks to changes in corporate governance

Japan has long resisted unsolicited takeovers. Despite the prevalence of such transactions in other large M&A markets such as the US and in Europe, never has there been a successful foreign hostile takeover of a major Japanese target—although many acquirers have tried and failed.

A domestic transformation is making foreign takeovers more plausible. Last summer, Murakami Fund co-founder Yoshiaki Murakami took control of Japan Asia Group after a brutal eight-month campaign for the company, in what some have called Japan's first major successful hostile corporate takeover—or at least the first widely publicized hostile takeover in recent years by an investor rather than a competitor.

But already last year, discount furniture chain Nitori had successfully acquired DIY chain Shimachu for US$2 billion. Nitori’s bid was a competing offer for Shimachu, after the target had already agreed to a bid from DCM Holdings, which owns a rival chain of hardware stores. The deal represents the first successful takeover attempt in Japan by a buyer that did not hold a stake in the target before making an unsolicited bid.

Also in 2020, Japanese restaurant chain Colowide Co. announced that it had seized a 47% stake in Ootoya Holdings in what has been dubbed an “unfriendly move” against the competing chain. Colowide announced plans to shore up the struggling restaurant chain by retooling management and cutting costs.

Cross-shareholding presents a barrier 

Commentators have struggled to explain why Japanese companies have historically been so unfriendly to unsolicited bids. Some argue that Japan’s legal defensive measures have an anti-takeover bent having developed in a different context to those seen in western markets.

Another claim is that this aversion is cultural, that corporate boards are made up of lifetime employees who are resistant to the radical change associated with a forced buyout.

But most agree that the country’s unique cross-shareholding plays a major role. In Japan, there is a complex network of interwoven share ownership among domestic companies known as keiretsu, which means “system.”

For example, banks often hold stock in the companies to which they lend, while borrowers reciprocate by holding positions in the bank. This complex web of relationships can be seen across sectors, and may serve to stifle takeover activity, serving as a rigid structural barrier to entry.

Shareholders rally in support of incumbent management teams, voting in favor of management’s motions and blocking unsolicited takeover attempts and against shareholder proposals. 

New beginnings

Times are changing. Efforts to modernize the country’s corporate governance are showing early signs of success. While there has not been an explosion of unsolicited takeover attempts, management and boards are more open to input from proactive shareholders pushing for change and, ultimately, growth—even if they come from overseas. 

Last year, 55 Japanese public companies faced proposals from shareholders during the June AGM season, continuing a trend of steady increase from 42 in 2018 and 54 in 2019. Rather than blindly backing management, shareholders, made more independent by the unwinding of cross-shareholding networks, are tabling motions.

Reforms yield results 

One of former Prime Minister Shinzo Abe’s core policy initiatives was to improve corporate governance in the country. Following a number of high-profile accounting scandals, Japan introduced a corporate governance code in 2015 to increase transparency. 

As part of this, companies listed on the Tokyo Stock Exchange were forced to justify their holdings, with a requirement that boards annually assess the business’s cross-shareholdings to determine whether they are appropriate and whether the associated risks and benefits of these interests offset the cost of capital. 

The code has since gone through two revisions, first in 2018 and again this year. In addition to promoting both diversity and sustainability, changes have been made to further improve corporate governance. The updates include increasing the number of independent directors from two to at least one-third of the board for Prime Market-listed companies. (The Tokyo Stock Exchange is reorganizing into three segments: Prime Market, Standard Market, and Growth Market.)

The code also now calls for these companies to establish nomination and remuneration committees, and appoint independent directors that have managerial experience at other companies. Companies have to adopt the code on a “comply or explain” basis, meaning that they will find it harder to obfuscate or deflect shareholder enquiries. 

The purpose of this change is ultimately to improve dialogue with shareholders, Japanese or otherwise. One of the other provisions of the code is to promote the use of electronic voting platforms and disclosures in English. While the code is still in its bedding down phase, it seems likely that this revision will further shift attitudes and Japanese corporate culture, opening boards and management to the influence and direction of shareholders, as has been seen in western markets for some time already. 

With this modernization of the governance rulebook, unsolicited and even hostile takeover attempts are bound to become more normalized in the Japanese M&A scene in coming years.

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