FOREIGNER MERGERS & ACQUISITIONS - TO DO OR NOT TO DO
KEYWORDS: MERGERS & ACQUISITIONS, TAX LAW, POISON PILLS

As a part of the program to initiate a major reform in corporate law in 2006 Japan officially says it is will taking measures to make it easier to for foreigners in mergers and acquisitions. As is often the case in Japan, particularly with respect to foreigners, these decisions are made with the greatest of ambivalence.

These measures were supposed to be taken as a part of Prime Minister Koizumi’s plan to greatly increase foreign investment in Japan. On this point, the difference between Japan and China is striking. Much of China’s explosive growth in the past decades has been fueled by massive foreign investment. A look at Japan’s post-war economy has seen one legal maneuver after another to restrict such investment. From time to time there have been slow gradual openings, but once it looks too successful the criticism starts to fly fast & furious. The ambivalence can also be seen in cases where what it takes out with one hand, it puts back with another. A decade ago when there was the “Big Bang” deregulation some reporting on international transactions by financial authorities were replaced with even more stringent tax controls.

So back to mergers & acquisitions. The government does not permit foreign corporations to take over Japanese corporations with direct share swaps. What is permitted involves some kind of merger of the Japanese firm with the subsidiary in Japan of the foreign firm. Tax experts report however that this system will not succeed if tax changes are also not changed in order to prevent profits from being realized from deemed sales of shares. The response of the Japanese government appears to be that the tax changes may come into effect after a period when they can see how the merger changes go. Japanese business circles are reportedly in fear due to the massive valuations of the shares of foreign corporations (it was the other way around in the 1980s). In fact, despite the official line by Prime Minister Koizumi to increase foreign investment, the Japanese business world was in such an uproar of concern that the Ministry of Economy, Trade and Industry established a study group on how to increase company defenses against hostile takeovers, particularly foreign takeovers.

In late 2003 two Japanese corporations were able to withstand foreign takeover bids primarily through the tool of raising their dividends from 12-13 yen per share for many years, to the much higher 200 yen per share. The ministry is recommending traditional defensive structures such as the inter-holding of shares among corporations with other corporations and strengthening their relationships with their primary bank.

Ironically, many business commentators, including Japanese business commentators have noted that part of Japan’s business recovery in recent years after the painful lost decade of the 1990s, was Japanese businesses dropping such practices.

So here we have once again one group saying we will make things easier for the foreigners, and another governmental group studying how to defend against it.

An advisory body to the Ministry of Justice has made a recommendation that Japanese corporations being acquired in a merger/acquisition must give an explanation to their shareholders. This would include an explanation of the calculation of the valuation of the shares of the companies in the exchange, particularly where it involves more than just a share exchange, as well as an explanation on why management recommends the exchange. The information would be made available to all shareholders and could be put on websites.

Copyright 2005. All rights reserved Attorney Roderick H. Seeman

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