Japan set to tighten stock merger rules Foreign companies would need to seek approval from over 50 per cent of shareholders by headcount By David Ibison in Tokyo FT, November 21, 2005
Japan is considering new rules that would make it almost impos-sible for foreign companies to conduct all-stock mergers with Japanese companies, reversing a government pledge to liberalise the market for foreign direct investment. The proposed new rules would force a foreign company conduct-ing a share-for-share transaction to secure a "super extraordinary resolution" from the target group's shareholders, requiring approval from more than 50 per cent of shareholders by head-count. This would mean that if one institution holds 75 per cent of the Japanese company being tar-geted and 1,000 small sharehold-ers hold the remaining 25 per cent, even if the 75 per cent shareholder approves the deal, another 500 approvals must be obtained. Most Japanese companies had a highly fragmented shareholder base making the chances of securing approval from more than 50 per cent of shareholders almost impossible, experts said. In addition, the proposals would force any foreign company looking to conduct an all-stock transaction to obtain a secondary listing in Japan before doing so. "This is a strong disincentive,"said Casper Lawson, a partner at Linklaters, the law firm. "It is possible to get a secondary list-ing, but by global standards it is very unusual." The proposed changes, being considered by the justice minis-try as part of regulations imple-menting Japan's new Company Law, are the latest chapter in a controversy surrounding share-for-share transactions that culmi-nated in last year's decision to delay the introduction of such deals by 12 months to next May. It was claimed that decision was taken to allow Japanese companies time to protect them-selves against aggressive foreign companies, even though share-for-share deals are rarely hostile as they require the consent of the target company's shareholders. Experts said it now appeared Japan was considering introduc-ing new hurdles to prevent cross border share-for-share deals. "Clearly, its protectionism," said one market professional. M&A bankers said the pro-posed restrictions penalise poten-tially friendly foreign merger partners for Japanese companies but leave the door open for Japa-nese-led hostile deals. All of the truly hostile deals in Japan in the past 12 months have been Japanese affairs, such as the bid by Livedoor, the internet company, for Fuji Television. The proposed new rules contra-dicted a pledge by Junichiro Koi-zumi, Japan's prime minister, in his policy speech before parlia-ment in 2003 to double foreign direct investment into Japan by 2008 by liberalising the environ-ment for FDI, bankers said. The majority of FDI flows into Japan are M&A related and moves to permit share-for-share transactions were considered a vital part of achieving Mr Koi-zumi's goal. "It is no exaggeration to say that if this single measure ends up eviscerated and unusable, Japan's FDI policy will be little more than a joke," said one foreign market professional. The proposals are due to be released for consideration at the end of this month.
