Securities Regulation

Mandatory Tender Offers in Japan: Expanded Scope and Implications Under the 2024 FIEA Amendments

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read
Slide summary: 2024 FIEA update—30 % MTO trigger, inclusion of market buys, abolished rapid-purchase rule
TL;DR: The 2024 FIEA amendment extends Japan’s mandatory tender-offer (MTO) trigger to on-exchange purchases that push a buyer over 30 % of voting rights, closing the “market-sweep” loophole. It also abolishes the rapid-purchase rule and tightens disclosure—bringing Japan closer to global norms while retaining its pre-emptive bid model.

Table of Contents

  1. Introduction
  2. The Pre-2024 Mandatory TOB Landscape: A System with Gaps
  3. The Core Reform: Bringing Market Purchases into the MTO Fold
  4. Implications of the Expanded MTO Scope
  5. Related Changes and Lingering Debates
  6. Conclusion

Introduction

The landscape of mergers and acquisitions (M&A) and corporate control transactions in Japan has been significantly reshaped by recent legislative changes. Central to this transformation is the reform of the Mandatory Tender Offer (MTO) system under the Act for Partial Amendment of the Financial Instruments and Exchange Act (FIEA) and the Act on Investment Trusts and Investment Corporations (Act No. 32 of 2024), promulgated on May 22, 2024.

Stemming from extensive deliberations within the Financial System Council's Working Group, these amendments, particularly the expansion of the MTO scope, represent a fundamental shift from Japan's previous regulatory approach. Historically, Japan's MTO rules contained a significant gap: acquisitions made directly on the open stock market were largely exempt, allowing for "creeping acquisitions" or "market sweeps" to gain control without triggering the formal protections of a tender offer. This practice raised concerns about shareholder equality, transparency, and the potential for coercive acquisition tactics.

This article provides an in-depth analysis of the changes to Japan's MTO rules, focusing on the rationale behind extending their reach to market purchases, the establishment of a new 30% threshold, and the broader implications for acquirers, shareholders, and the Japanese M&A market overall.

1. The Pre-2024 Mandatory TOB Landscape: A System with Gaps

To appreciate the significance of the 2024 reforms, it's essential to understand the previous MTO framework under the FIEA. A mandatory tender offer was generally required only in specific circumstances, primarily involving off-market transactions:

  • The "5% Rule": Acquiring shares from more than 10 persons outside the market within a 60-day period, resulting in ownership exceeding 5% (former FIEA Art. 27-2, Para. 1, Item 1). This aimed to protect investors from pressure selling in concentrated off-market solicitations.
  • The "One-Third Rule": Acquiring shares outside the market (even from a small number of sellers) or through certain off-auction systems (like ToSTNeT), resulting in ownership exceeding one-third (approx. 33.3%) (former FIEA Art. 27-2, Para. 1, Items 2 & 3). The rationale was less clearly defined but generally understood to relate to ensuring transparency and some measure of equal opportunity when a transaction could significantly affect corporate control.
  • Other Specific Rules: Additional rules mandated TOBs in limited situations, such as certain "rapid purchases" combining off-market and market trades near the one-third threshold (the kyuusoku na kaitsuke kisei, former Item 4) or acquisitions by a major shareholder during a competing TOB (former Item 5).

The Critical Exemption: Open Market Purchases
The most significant feature of the old regime was the general exemption for purchases made directly on the open market (shijo-nai torihiki or tachiai-nai torihiki). The traditional justification was that stock exchange trading mechanisms provided inherent transparency (price and volume disclosure) and fairness (competitive bidding). However, this view faced increasing criticism. It failed to account for:

  1. Information Asymmetry and Coercion: Shareholders selling in the market during a rapid stake build-up by an acquirer often lack crucial information about the acquirer's ultimate intentions or the potential long-term impact on corporate value. This can create coercive pressure to sell quickly, fearing being left behind as a minority shareholder in a potentially less valuable company, without the benefit of a control premium.
  2. Lack of Equal Opportunity: A market sweep allows the acquirer to gain control without offering all shareholders the same opportunity to sell at a premium price, which a formal TOB typically provides.
  3. Circumvention: Acquirers could deliberately use market purchases to gain effective control while avoiding the disclosure, timing, and pricing requirements associated with a formal TOB. The one-third threshold, while significant, could be strategically approached without triggering a mandatory bid if acquisitions were primarily market-based.

Cases highlighting these issues, such as the 2021 Supreme Court decision (November 18, 2021, Reiwa 3) concerning defensive measures against a large-scale market accumulation of shares in a machinery manufacturer, underscored the need for reform. The existing framework was increasingly seen as inadequate for protecting shareholder interests in the face of evolving acquisition tactics.

2. The Core Reform: Bringing Market Purchases into the MTO Fold

The 2024 FIEA amendments address the shortcomings of the previous system through two primary, interconnected changes:

2.1. The New 30% Threshold

The main trigger point for a mandatory TOB has been lowered from one-third (approx. 33.3%) to 30% of total voting rights (Revised FIEA Art. 27-2, Para. 1, Item 1, often referred to as the "30% Rule").

The rationale for selecting 30% includes:

  • International Harmonization: Aligning more closely with mandatory bid thresholds common in other major jurisdictions, particularly the EU, enhancing predictability for international investors.
  • Practical Control Level: Recognizing that in many Japanese companies with dispersed shareholdings, owning 30% of voting rights often provides de facto control or at least significant blocking power. This level is typically sufficient to prevent the passage of special resolutions requiring a two-thirds majority (e.g., charter amendments, major reorganizations) and exert considerable influence over ordinary resolutions (e.g., director elections).

2.2. Inclusion of Market Purchases

This is the centerpiece of the MTO reform. Under the revised Art. 27-2, Para. 1, Item 1, the 30% threshold applies irrespective of the purchase method. Acquisitions made on the open stock market are now aggregated with off-market purchases when determining if the 30% threshold will be crossed. If any combination of purchases (on-market, off-market, or through off-auction systems) results in the acquirer's voting rights ratio exceeding 30%, the entire purchase that crosses the threshold must be conducted via a formal TOB process (unless specific exemptions apply).

2.3. Policy Objectives of the Expanded Scope

The inclusion of market purchases within the MTO regime aims to achieve several key policy goals identified during the reform process:

  • Enhanced Shareholder Protection: The primary goal is to ensure that when a transaction potentially leads to a change in corporate control or significant influence, all shareholders are treated fairly. This includes:
    • Information Disclosure: Acquirers must provide detailed information through a TOB registration statement.
    • Sufficient Time: Shareholders are given a defined period (the TOB period) to consider the offer.
    • Equal Opportunity: All shareholders have the chance to tender their shares under the same terms and conditions.
  • Preventing Coercive Market Sweeps: By mandating a formal TOB once the 30% threshold is approached via any purchase method, the reform aims to eliminate the pressure on shareholders to sell hastily in the market due to fear or lack of information during a creeping acquisition.
  • Transparency in Control Transactions: It ensures that significant shifts in ownership concentration occur through a regulated, transparent process rather than incrementally through less visible market operations.
  • Fair Distribution of Control Premium (?): While Japan's TOB rules still do not mandate a minimum price based on previous purchases (unlike the strict rules in the EU model), requiring acquisitions over 30% to go through a TOB enhances the opportunity for shareholders to potentially share in a control premium offered by the bidder. It prevents acquirers from securing control solely through market purchases at potentially lower, non-premium prices.

3. Implications of the Expanded MTO Scope

This fundamental change in the MTO trigger has significant implications for various market participants:

3.1. Impact on Acquirers

  • Stakebuilding Strategies: Acquirers can still build initial stakes ("toeholds") below the 30% threshold through market purchases without triggering a TOB. However, crossing the 30% line now requires switching to a formal TOB. This limits the viability of strategies aimed at achieving outright control purely through open market accumulation.
  • Procedural Burden: Using market purchases to cross the 30% threshold now involves the full procedural requirements of a TOB (filing registration statements, setting an offer period, potential withdrawal rights for tendering shareholders, etc.), increasing time and cost compared to purely market-based acquisitions under the old rules.
  • Hostile Takeovers: While hostile TOBs remain possible, the inability to gain rapid control through market sweeps above 30% might slightly alter the dynamics, potentially giving target companies more time to react or prepare defenses once a significant stake (approaching 30%) becomes visible through LSR filings, even before a TOB is formally launched.

3.2. Impact on Shareholders

  • Increased Protection: Minority shareholders gain significant protection against potentially coercive creeping acquisitions and are less likely to be pressured into selling shares without adequate information or a potential premium.
  • Improved Decision-Making: The mandatory TOB process guarantees access to standardized information (offeror's plans, funding, offer conditions, target board's opinion, etc.) and a defined period for evaluation.
  • Enhanced Opportunity: All shareholders receive an equal chance to participate in the control transfer transaction at the offered price once the 30% threshold necessitates a TOB.

3.3. Impact on the M&A Market

  • Transparency and Predictability: The clearer rules, particularly the inclusion of market purchases, enhance the predictability of the regulatory framework for both domestic and international players involved in Japanese M&A.
  • Potential Increase in TOBs: Acquisitions aiming for control or significant influence above 30% will now necessarily proceed via formal TOBs, potentially increasing the number of announced tender offers compared to strategies previously reliant on market sweeps.
  • Market Liquidity: Some observers questioned whether the rule might dampen liquidity if potential acquirers become more cautious about market purchases near the 30% threshold. However, stakebuilding below 30% remains unrestricted.

4. Related Changes and Lingering Debates

Beyond the core reform, other adjustments and ongoing discussions shape the context of Japan's MTO system.

4.1. Abolition of the Rapid Purchase Rule

As noted earlier, the kyuusoku na kaitsuke kisei was abolished. While its primary anti-circumvention role related to the old framework, its removal eliminates a specific regulatory check on the speed of accumulation combining different purchase types below the threshold. The final legislation diverged from the WG report's initial proposal to retain and adapt this rule. The prevailing view in the legislative process was likely that the main 30% rule sufficiently addressed the core risks, and retaining a complex rapid purchase rule could unduly hinder legitimate pre-bid stakebuilding. The full impact of this abolition on acquisition dynamics remains to be observed.

4.2. The Japanese MTO Model: Pre-emptive Trigger vs. Post-Acquisition Obligation

Legal scholars often contrast Japan's TOB system with the model prevalent in the EU.

  • Japan's Model (Pre-emptive Trigger): Japan regulates the act of purchasing shares that will result in exceeding the threshold. The obligation is to conduct that specific purchase via a TOB. The 2024 reform reinforces this "pre-emptive" approach by applying it firmly to market purchases.
  • EU Model (Post-Acquisition Obligation): In the EU, crossing a defined threshold (often 30%) through any means typically triggers an obligation to launch a mandatory bid for all remaining shares at a prescribed minimum price (often linked to the highest price paid previously by the acquirer). This is a "post-acquisition" obligation focused on providing an exit opportunity for remaining shareholders at a fair price after control has effectively passed.

The 2024 Japanese reforms, while expanding the trigger for a mandatory bid, did not adopt key features of the EU model. Japan still generally:

  • Does not have a strict minimum price rule linked to prior purchases.
  • Does not automatically trigger an MTO when control shifts due to share issuances (e.g., third-party allotments) rather than purchases.
  • Permits partial tender offers (bids for less than all shares), although acquiring two-thirds or more via a TOB does trigger an obligation to purchase all shares offered (FIEA Art. 27-13, Para. 4 - the zenbu kaikaku gimu).

The WG considered moving closer to the European model, but significant changes like introducing a strict minimum price rule or extending MTOs to share issuances were ultimately deferred for future consideration, indicating Japan's MTO system retains its distinct characteristics.

4.3. Interaction with the Two-Thirds Threshold

An important consequence of including market purchases in the MTO calculation is its interaction with the existing two-thirds threshold. Under FIEA Art. 27-13, Para. 4, if a TOB results in the bidder holding two-thirds or more of the voting rights, the bidder must purchase all shares tendered (the zenbu kaikaku gimu or obligation for full purchase). Before the reform, reaching this threshold via market purchases alone did not trigger this obligation. Now, if market purchases (or a combination) are used to cross the 30% threshold, initiating a TOB, and that TOB subsequently results in the bidder reaching the two-thirds level, the obligation to buy all tendered shares applies. This strengthens minority shareholder exit rights in scenarios where control sufficient for squeeze-outs is obtained, even if initiated through market accumulation prior to the formal TOB necessitated by the 30% rule.

Conclusion

The 2024 FIEA amendments mark a watershed moment for Japan's Takeover Bid regulations. By bringing open market purchases squarely within the scope of the mandatory tender offer requirement and setting the trigger at a practical 30% threshold, the reforms significantly enhance shareholder protection, increase transparency surrounding control transactions, and address circumvention tactics prevalent under the old regime.

This overhaul fundamentally alters the strategic calculations for acquirers seeking significant stakes or control in Japanese listed companies. While stakebuilding below 30% remains flexible, crossing this line now mandates adherence to the formal TOB process, regardless of the purchase method. The abolition of certain specific rules simplifies the framework, although the removal of the Rapid Purchase Rule warrants ongoing observation regarding its impact on rapid accumulations.

While the reforms align Japan more closely with certain international norms, the MTO system retains distinct features, differing notably from the post-acquisition obligation model common in Europe, particularly regarding minimum price rules and applicability to share issuances. The practical impact of these changes, especially on M&A activity levels and strategies, will unfold over time. Furthermore, the persistent questions surrounding effective enforcement and the broader need for beneficial ownership transparency suggest that the evolution of Japan's corporate control regulations is likely far from over. For foreign corporations and investors, a thorough understanding of this new MTO landscape, combined with expert legal counsel, is more critical than ever for successful navigation of the Japanese market.