Corporate Governance

New Landscape for Corporate Acquisitions in Japan: Understanding the "Guidelines for Corporate Acquisitions"

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read
Slide summarising METI’s 2023 acquisition guidelines: three core principles, board duties, special-committee process and stringent conditions for defensive measures.

TL;DR

  • METI’s August 2023 “Guidelines for Corporate Acquisitions” establish three core principles—corporate value focus, shareholder intent and transparency—shifting boards from defensive reflexes to value-justified decision-making.
  • Target boards must report bids promptly, weigh them sincerely, manage conflicts through independent committees and disclose reasoning; bidders must engage in good-faith negotiation.
  • Defensive measures (poison pills, warrants) become “exceptional” tools, requiring clear harm evidence and shareholder—ideally majority-of-the-minority—approval.

Table of Contents

  • Background and Objectives: Why New Guidelines?
  • Scope: Control Transactions, Including Unsolicited Bids
  • Core Principles Guiding Acquisition Conduct
  • The Target Board's Conduct: Duties and Expectations
  • Guidance on Takeover Defenses (“Response Policies” and “Countermeasures”)

Japan's mergers and acquisitions (M&A) landscape is undergoing a significant transformation. Driven by factors like corporate restructuring needs, pressure to improve capital efficiency (highlighted by the Tokyo Stock Exchange's focus on low Price-to-Book Ratios), increasing shareholder activism, and a desire to align with global best practices, the environment for corporate control transactions is becoming more dynamic. Recognizing this, Japan's Ministry of Economy, Trade and Industry (METI) released its comprehensive "Guidelines for Corporate Acquisitions" (企業買収における行動指針, Kigyō Baishū ni okeru Kōdō Shishin, hereafter "Guidelines") in August 2023. These non-binding, "soft law" guidelines aim to establish clearer principles and expected standards of conduct for parties involved in acquisitions that result in a change of corporate control, particularly focusing on the duties of target company boards. For foreign companies contemplating acquisitions in Japan or investors engaging with Japanese corporations, understanding these Guidelines is essential.

Background and Objectives: Why New Guidelines?

The Guidelines build upon, and partially supersede, earlier governmental guidance but address a broader scope and reflect recent market developments.

  • Filling a Gap: METI's 2019 "Fair M&A Guidelines" focused primarily on transactions with inherent structural conflicts of interest, such as Management Buyouts (MBOs) and acquisitions of controlled subsidiaries by parent companies. However, clear norms for board conduct in standard, third-party acquisitions (especially unsolicited ones) were less developed.
  • Evolving Takeover Defense Landscape: The 2005 METI/Ministry of Justice "Takeover Defense Guidelines" primarily addressed the implementation of pre-emptive defensive measures ("poison pills"). Since then, the prevalence of such measures has significantly declined due largely to opposition from institutional investors and court decisions emphasizing shareholder approval for significant defensive actions. The new Guidelines reflect this shift, focusing more on the board's conduct in response to any control acquisition proposal, rather than just the deployment of defenses.
  • Promoting Value-Enhancing M&A: The overarching goal, as stated in the Guidelines, is to foster an M&A environment where transactions that genuinely enhance corporate value and shareholder interests can occur actively and fairly. This involves ensuring transparency, promoting rational decision-making by boards based on value maximization, and ultimately respecting shareholder decisions on control transfers.

Scope: Control Transactions, Including Unsolicited Bids

The Guidelines primarily target transactions where a bidder seeks to acquire control of a listed Japanese company. This typically involves:

  • Acquiring a majority (or near-majority) of voting rights.
  • Transactions primarily using cash consideration (though share-based deals aren't explicitly excluded from the principles).
  • Methods including tender offers (公開買付け, kōkai kaitsuke) and substantial market purchases (市場内買付け, shijōnai kaitsuke).

Crucially, the Guidelines explicitly cover unsolicited or non-consensual acquisition proposals – situations where the target board has not invited or necessarily welcomed the bid. This focus on potentially contested situations is a key aspect of the new guidance.

Transactions involving the acquisition of subsidiaries from a parent are generally considered outside the primary scope, as they involve different dynamics (e.g., group portfolio strategy) and are partly covered by the 2019 Fair M&A Guidelines.

Core Principles Guiding Acquisition Conduct

The Guidelines articulate three fundamental principles intended to underpin the behavior of all parties involved in corporate acquisitions:

  1. Focus on Corporate Value and Shareholder Common Interests: The ultimate benchmark for evaluating any acquisition proposal should be its impact on securing and enhancing Corporate Value (企業価値, kigyō kachi) and, consequently, the Shareholder Common Interests (株主共同の利益, kabunushi kyōdō no rieki). The Guidelines define corporate value in line with standard corporate finance theory – the aggregate discounted present value of future cash flows generated by the company, represented by the sum of shareholder value (market capitalization) and debt value.
  2. Respect for Shareholder Intent: Matters concerning the fundamental control of the company should ultimately be decided based on the reasonable intent of the shareholders. This principle elevates the role of shareholders in determining the fate of acquisition proposals.
  3. Ensuring Transparency: Both the bidder and the target company's board have a responsibility to provide shareholders with sufficient, accurate, and timely information to make informed decisions regarding an acquisition proposal. This includes compliance with relevant disclosure laws (e.g., under the Financial Instruments and Exchange Act - FIEA) and potentially providing additional information deemed necessary for shareholder judgment.

The Target Board's Conduct: Duties and Expectations

A significant portion of the Guidelines details the expected conduct of the target company's board of directors and individual directors when faced with an acquisition proposal.

  • Duty to Report and Consider: Upon receiving a bona fide proposal for a control acquisition, management (especially representative directors) should promptly report it to the full board of directors for consideration. Treating such proposals dismissively at the management level without board involvement is discouraged.
  • Duty of Sincere Consideration (真摯な検討, shinshi na kentō): The board has a duty to give any bona fide proposal sincere and serious consideration. This evaluation should primarily focus on whether the proposal contributes to corporate value and shareholder common interests (Principle 1). Key factors include the offer price/terms, the bidder's post-acquisition plans, financing certainty, strategic rationale, and overall feasibility. The board should avoid rejecting proposals based on improper motives, such as management entrenchment. The Guidelines caution against arbitrarily deeming a proposal not "bona fide" simply because it is unsolicited or unwelcome.
  • Managing Conflicts of Interest: The Guidelines acknowledge that directors' and management's interests may sometimes diverge from those of shareholders in an acquisition context (e.g., concerns about job security). Procedures must be in place to manage these potential conflicts and ensure decisions prioritize corporate value and shareholder interests.
    • Special Committees: While not mandated for all third-party deals, establishing a special committee composed primarily of independent outside directors is presented as a useful tool for ensuring fairness, particularly in situations with heightened conflict potential or complexity. The Guidelines suggest considering a special committee in cases like: proposals involving potential cash-outs, situations where defensive measures are contemplated, or scenarios with multiple competing public bids requiring careful evaluation and explanation.
    • Independent Advice: Obtaining advice from independent financial and legal advisors is crucial for the board (and any special committee) to make informed judgments.
  • Negotiation and Recommendation: The board is expected to engage reasonably with bidders and, where appropriate, negotiate to secure the best possible terms for shareholders. Based on its evaluation, the board should form an opinion on the proposal and clearly communicate its recommendation (support, opposition, neutrality) and reasoning to shareholders.
  • Information Disclosure: The board must ensure shareholders receive adequate information and sufficient time to properly evaluate the proposal before needing to make a decision (e.g., before a tender offer period closes).

Guidance on Takeover Defenses ("Response Policies" and "Countermeasures")

The Guidelines significantly update the thinking on takeover defenses, adopting a more restrictive and shareholder-centric approach than the 2005 Takeover Defense Guidelines. They use the terms "Response Policy concerning Large-Scale Purchases of Share Certificates, etc." (対応方針, taiō hōshin) to refer to pre-adopted plans (like poison pills) and "Countermeasures" (対抗措置, taikō sochi) for specific defensive actions (like issuing warrants).

  • Exceptional Use Only: Defensive measures are positioned as tools to be used only in exceptional and limited circumstances where necessary to protect corporate value and shareholder common interests from specific threats posed by an acquisition proposal (e.g., coercive two-tiered offers, bids aiming to acquire control without paying an adequate premium, structurally flawed bids). They should not be used for management entrenchment.
  • Primacy of Shareholder Decision: The Guidelines strongly emphasize that the decision to adopt a Response Policy or, critically, to trigger Countermeasures should rely on shareholder intent (Principle 2).
    • Shareholder Approval Preferred: Obtaining explicit shareholder approval (e.g., at a general meeting) for adopting a Response Policy or triggering Countermeasures significantly strengthens the justification for their use and enhances their legal defensibility.
    • Board-Only Decisions Highly Restricted: Invoking countermeasures based solely on a board decision (without specific prior shareholder authorization for that invocation) is viewed as permissible only in truly exceptional circumstances akin to an emergency evacuation, where seeking shareholder approval is practically impossible, and the board can clearly demonstrate the measure is necessary to protect shareholder interests.
    • Excluding Interested Shareholders: The Guidelines acknowledge the controversial practice of excluding the bidder and related parties from shareholder votes on defensive measures. While not prohibiting it outright, the Guidelines express caution, noting such exclusions should be considered only in very limited, exceptional cases, and the specific grounds and scope need careful justification to avoid undermining shareholder democracy. The legitimacy of such votes remains a debated legal issue.
  • Necessity and Proportionality: Any Countermeasure must be necessary to address the specific threat posed by the bid and proportionate – it should not be more drastic than required to protect corporate value and shareholder interests.
  • Transparency: The details of any Response Policy and the specific reasons for invoking Countermeasures must be fully and clearly disclosed to shareholders and the market.

This stance reflects a clear shift towards empowering shareholders in control contests and limiting the board's ability to unilaterally block acquisition proposals through defensive tactics, aligning more closely with governance norms emphasizing board accountability to shareholders.

Transparency in Acquisitions

Reinforcing Principle 3, the Guidelines stress the need for transparency from both bidders and targets.

  • Bidder Disclosure: Bidders are encouraged to provide clear information about their identity, funding, post-acquisition plans, and the rationale for the offer price. For significant market purchases aiming for control outside the formal tender offer rules, the Guidelines suggest best practices for providing information comparable to tender offer disclosures to allow informed shareholder decisions.
  • Substantial Shareholder Transparency: Acknowledging the long-standing challenge of identifying ultimate beneficial owners in Japan (due to limitations in disclosure rules below the 5% threshold), the Guidelines encourage bidders, especially those acting in concert or potentially representing undisclosed principals, to be transparent about their ultimate ownership and intentions.
  • Target Disclosure: As mentioned, target boards must provide reasoned recommendations. During the evaluation process, disclosure should be cautious to avoid disrupting markets or negotiations. However, once a course of action is decided (e.g., supporting or opposing a bid, seeking alternatives), clear disclosure is expected. Importantly, the Guidelines emphasize that even if a deal does not materialize, the board should be prepared to justify its actions and decisions to shareholders retrospectively to fulfill its accountability duty.

Conclusion: Key Implications for Business

The 2023 METI Guidelines for Corporate Acquisitions, while technically non-binding soft law, are expected to significantly influence market practice, board conduct, and potentially judicial interpretation in Japan. For international companies and investors:

  • Board Accountability is Heightened: Target boards face clearer expectations regarding their duty to sincerely evaluate all bona fide acquisition proposals based on corporate value and shareholder interests, manage conflicts effectively, and justify their decisions transparently.
  • Shareholder Primacy in Control Contests: The Guidelines reinforce the principle that shareholders should ultimately decide the fate of control transactions. This translates into strong skepticism towards defensive measures deployed without explicit shareholder backing.
  • Increased Deal Transparency: Both bidders and targets are encouraged (and in some areas, implicitly pressured) to provide more comprehensive and timely information to allow shareholders to make informed decisions.
  • Focus on Value Creation and Allocation: The emphasis on enhancing corporate value and ensuring fair allocation of synergistic gains places greater focus on the economic rationale and proposed terms of acquisitions.

Navigating M&A in Japan now requires careful consideration of these Guidelines alongside existing legal frameworks like the Companies Act and the FIEA, as well as the overarching principles of the Corporate Governance Code. Companies and their advisors should anticipate that board decisions, bidder conduct, and the use of defensive tactics will increasingly be assessed against the principles and best practices articulated in this new guidance.