JAPANESE UPDATE – Revision of Business Combination Investigation Procedures Under Antimonopoly Act Could Influence Cross-Border Deals’ Timing and Best Practices
Highlights:
- The Japan Fair Trade Commission (JFTC) has abolished the prior consultation procedures and revised the Guidelines to the Application of the Antimonopoly Act Concerning Revision of Business Combination in order to enhance predictability.
- Under the New Policies, JFTC must implement consultation upon receipt of notification, and the business combination reviews are unified in the new statutory system which is subject to strict time limits pursuant to the Act.
- Unlike the prior system, the New Policies require JFTC to explain the content and scope of the review or the expected schedule if a notifying corporation requests an explanation regarding such issues arising under the Act or if JFTC itself finds such explanation is necessary.
I. Introduction
On June 14, 2011, The Japan Fair Trade Commission (hereinafter, the “JFTC”) revised two elements in business combination reviews (investigation procedure and criteria). The JFTC abolished the prior consultation procedures of the past and newly laid down “Policies Concerning Procedures of Review of Business Combination” (hereinafter, the “New Policies”) in order to further improve the swiftness, transparency and predictability of business combination reviews.
At the same time of the procedural revision mentioned above, the JFTC partially revised the “Guidelines to the Application of the Antimonopoly Act Concerning Revision of Business Combination” . Specifically, the JFTC (i) clarified cases where the holding of shares is not subject to business combination reviews, (ii) added examples in which the JFTC recognized the world or the East Asian market regarding the concept of “Geographical Range” in legal requirements of the “Particular Field of Trade”, and (iii) clarified and added examples, etc. regarding each factor of competitive pressure including imports, market shrinking, competitive pressure from competitive products and recognition of bankruptcy in the elements to evaluate whether the business combinations may substantially restrict competition, in order to enhance predictability of business combination investigations. The JFTC has implemented the new business combination reviews based on these new policies and guidelines since July 1, 2011.
Initially we would like to give a brief outline herein of the revisions and subsequently the influence on M&A transaction practice in Japan with regard to the investigation procedures which would practically have a strong influence on M&A transactions in scheduling, etc.
II. Outline of the Revised Investigation Procedure
1. Outline of the System
Based on the Antimonopoly Act (hereinafter, the “Act”), a corporation planning to conduct acquisitions of shares, statutory mergers, divestitures (absorption-type split and joint incorporation-type split), joint share transfers (kyodo kabushiki iten), and transfers of business (hereinafter, collectively the “M&A Transactions”) shall file notification of business combination plans regarding M&A Transactions to the JFTC, if it satisfies the threshold required for notification (Article 10, Paragraph 2, Article 15, Paragraph 2, Article 15-2, Paragraphs 2 and 3, Article 15-3, Paragraph 2, and Article 16, Paragraph 2 of the Act). (The threshold regarding acquisition of shares is discussed below and there is a threshold regarding each of statutory mergers, divestitures, joint share transfers, and transfers of business.) For example for share acquisitions, a filing is required if: (i) the total Domestic Sales (i.e. the amount of money for sales of goods and services provided in Japan) of the acquirer and its Group of Combined Companies (i.e. the group of companies which is comprised of Subsidiaries of a corporation planning to notify the JFTC, its Parent which is not a Subsidiary itself (hereinafter, the “Ultimate Parent Company”) and the Subsidiaries of the Ultimate Parent Company (In this regard, a Subsidiary means a corporation whose management is controlled by another corporation holding more than 50 percent of its voting rights, etc. and a Parent means a controlling corporation.)) exceed 20 billion yen; (ii) the total Domestic Sales of the target corporation and its Subsidiaries exceed 5 billion yen; and (iii) the acquirer (together with its Group of Combined Companies) acquires more than 20 percent or 50 percent of the voting rights of all shareholders of the target corporation (Article 10, Paragraph 2 of the Act).
Under the New Policies, a corporation planning to notify the JFTC can first consult with the JFTC regarding the contents of the notification (hereinafter, the “Consultation”). The Consultation is implemented on a voluntary basis, therefore a corporation will not receive adverse treatment in the review after the notification even if the corporation elects not to have the Consultation (Note 1 in Part 2 of the New Policies).
If a corporation planning to notify the JFTC submits the notification form regarding a business combination plan to the JFTC, the notifying corporation is prohibited from effecting the M&A Transactions in question until the expiration of the 30-day waiting period from the date of receipt of notification (Article 10, paragraph 8, etc. of the Act).
During the waiting period, the JFTC determines whether there are any problematic issues in light of the Act and either provides notice that the JFTC will not issue an order to divest all or part of the shares, an order to transfer part of the business or some other order to cure a violation of the regulation in Article 10, Paragraph 1 , etc. of the Act (hereinafter, the “Cease and Desist Order”), or it will conduct a more detailed review and request submission of the necessary reports, information or materials, for example, regarding products or market share, etc. (hereinafter, “Request for Reports”) (Article 10, Paragraph 9, etc. of the Act). The review mentioned above is called the “Primary Review”. After the JFTC sends a Request for Reports, the waiting period is extended for 120 days from the date of receipt of the notification or 90 days after the date of receipt of all requested reports, whichever is later (Article 10, Paragraph 9, etc. of the Act). In this case, the JFTC determines whether there are any problematic issues regarding the business combination plans in light of the Act and will notify the subject corporations whether it will issue the Cease and Desist Order. This review is called, “Secondary Review”.
2. Main Areas of Difference from Prior System
Prior to the New Policies, a corporation planning to notify the JFTC usually implemented the prior consultation procedure with the JFTC on a voluntary basis, but there was always the possibility that the JFTC could make a request for submission of additional materials without the limitation of the statutory review period, based on the premise that, as a matter of fact, the JFTC reviewed the business combination plans and made a conclusion in this procedure.
On the other hand, a corporation planning to notify the JFTC still can implement the Consultation with the JFTC prior to the notification under the New Policies as in the past system. Under the New Policies, the JFTC must implement the Consultation upon receipt of notification and the business combination reviews are unified in the new statutory system, therefore it is subject to strict time limits pursuant to the Act.
Furthermore, unlike the prior system, the New Policies require the JFTC to explain the content and scope of the review or the expected schedule if a notifying corporation requests an explanation regarding such issues arising under the Act to the JFTC or if the JFTC itself finds such explanation is necessary, during the course of the investigation procedure. On the other hand, a notifying corporation can submit written opinions or offer remedies, at anytime.
III. Concrete Influence on M&A transaction practice
The following example will help to illustrate the influence of the New Policies on M&A transaction practice. A U.S. corporation, Corporation X (Buyer), engages in manufacturing and distribution of software, and plans to acquire the shares of a Japanese corporation, Corporation T (Target corporation), which also engages in manufacturing and distribution of software, from another U.S. corporation, Corporation Y (Seller). The total purchase price regarding the acquisition of shares is one hundred million U.S. dollars (hereinafter, the “Transaction”). Corporation X is then obliged to file a notification regarding the share acquisition to the JFTC prior to the share acquisition in the Transaction because Corporation X meets the notification requirements mentioned in II 1. above.
If Corporation X is required to notify the JFTC regarding the Transaction, Corporation X is required to obtain notice from the JFTC that it will not issue the Cease and Desist Order before closing the transfer of shares of the target corporation (Corporation T) to Corporation X at the latest because it is prohibited from acquiring the shares until after the expiration of the waiting period.
Prior to the New Policies, Corporation X would implement the prior consultation with the JFTC on a voluntary basis and notify the JFTC around the time of either execution of the share purchase agreement with Corporation Y, or conducting a tender offer procedure for the shares of Corporation T. However, the JFTC could make requests for submission of materials without limitation of the statutory reviewing period in the consultation if the JFTC was concerned about a possible violation of the Act; therefore, there was the possibility that the unpredictable influence on subsequent procedures in terms of scheduling could occur.
After the review under the New Policies, Corporation X can also implement the Consultation with the JFTC prior to the statutory investigation procedure on a voluntary basis as was done in the past practice and receive guidance from the JFTC regarding the Transaction. However, this differs from the prior system because Corporation X can inquire about the progress of the investigation during the course of the statutory waiting period.
However, please note that the JFTC can continue to make Requests for Reports to the notifying corporation in the Primary Review and still impede the expiration of the 90 days regarding the Secondary Review as a consequence of the fact that the notifying corporation delayed the submission of reports. It is essential for a corporation planning to file notification to the JFTC to address expected issues under the Act, and share an understanding regarding the schedule with the JFTC in the Consultation or at an early stage in the investigation procedure in order to ensure the JFTC review process proceeds as smooth and expeditious as possible.
Therefore it is advisable for a corporation to examine the necessity of notification, address expected issues arising from the Act, and adequately prepare materials regarding products or market share, etc. and written opinions for submission to the JFTC together with accounting, legal, and economic experts during the initial planning stages of a transaction if it is expected that notification will be necessary.
In conclusion, whether the parties can conduct M&A transactions more effectively under the New Policies depends on the parties understanding of the New Policies and cooperation with the JFTC. Then the operation and impact of the New Policies from now on will be substantial.
JAPANESE UPDATE – A Step Towards Easing Restrictions on Use of Exchange Offers by Japanese Companies Making Foreign Acquisitions
Executive Summary/Highlights:
- Japanese legal hurdles to cross-border exchange offers or triangular mergers have deterred Japanese acquirers from using their stock in cross-border acquisitions.
- A recent amendment to the Law on Special Measures for Industrial Revitalization and Innovation, which took effect on July 1, 2011, introduces a new path to facilitate exchange offers by Japanese firms by eliminating some legal hurdles.
- While the amendment is an important step forward to make exchange offers more feasible for Japanese buyers, its applicability is limited and there remain issues that must be addressed before exchange offers become a common practice inJapan.
MAIN ARTICLE
Introduction of New Rules regarding Exchange Offers by Japanese Firms
1. Exchange offers generally not feasible under existing rules
A shrinking domestic market and strong yen are driving more and more Japanese firms to seek out opportunities for overseas mergers and acquisitions. However, to date there have been only a few cases in which Japanese companies have used their stock as acquisition consideration in acquiring a foreign company. Among a variety of factors contributing to the scarcity of stock consideration in cross-border acquisitions by Japanese firms are legal hurdles in conducting cross-border exchange offers or triangular mergers under Japanese law.
In particular, exchange offers in which an acquirer’s stock is offered as consideration has not been a viable option for Japanese buyers. Because such exchange offers involve the issuance of new shares or the reissuance of treasury shares by the Japanese acquirer in exchange for contributions-in-kind of the target company’s shares tendered, the prevailing Japanese corporate law regime regarding the issuance or reissuance of shares and contribution-in-kind applies to exchange offers by Japanese firms. However, the current regime is not tailored to the unique considerations relevant to such exchange offers and as a result creates significant impediments to the use of such exchange offers. For instance:
(i) If the value of the target company’s shares significantly deteriorates following a Japanese acquirer’s decision to offer its shares in exchange for the target company’s shares tendered, the target company’s shareholders tendering their shares and certain directors of the acquirer may be personally liable for the difference between the value of the target company’s shares at the time the acquirer decides to offer its shares and the value at the time the acquirer’s shares are issued or reissued;
(ii) A review by a court-appointed inspector of the value of the target company’s shares as determined by the acquirer’s board or shareholders may be required, making it difficult to set the schedule for an exchange offer; and
(iii) If the acquirer’s stock is offered at an exchange rate that reflects a premium over the market price of the target company’s shares, a super-majority (two-thirds) approval of the acquirer’s shareholders may be required.
2. New rules under the amended Industrial Revitalization Law
An amendment to the Law on Special Measures for Industrial Revitalization and Innovation (the “Law”), which became effective as of July 1, 2011, introduces special measures that aim to eliminate several of the legal hurdles imposed by the Companies Act of Japan, subject to certain conditions. The Ministry of Economy, Trade and Industry of Japan (“METI”) promulgated this amendment in connection with its efforts to promote both domestic and cross-border mergers, acquisitions and restructuring transactions by Japanese companies as part of Japan’s growth strategy. Set forth below are some of the key points to be noted with regard to such special measures:
(1) Eligibility requirements and other noteworthy points
- First, in order to be eligible for the special measures, a Japanese acquirer must submit a plan that falls under one of the four categories of approved transactions involving exchange offers set forth in the Law, and obtain the approval of METI. The four categories are, namely, “reconstruction plan,” “plan for reuse of business resources,” “business resources integration plan, and “resource productivity innovation plan.” The plan should include the terms of a proposed transaction and elaborate the gains in productivity to be achieved by the contemplated transaction. METI publishes detailed criteria and numerical thresholds that a submitted plan must meet in order to obtain its approval.
- The availability of special measures is limited to exchange offers in which a Japanese acquirer aims to acquire “effective control” of the management of another company. In this regard, METI requires an acquirer to establish the minimum number of shares to be tendered in an exchange offer such that the acquirer will own 40% or more of the voting control of the target company following the transaction.
- The target company of an exchange offer eligible for the special measures can be either domestic or foreign.
- A Japanese acquirer can itself, or through its wholly-owned subsidiary, conduct an exchange offer. Particularly in the case of a cross-border exchange offer, a Japanese acquirer may elect to establish a wholly-owned subsidiary in the jurisdiction in which the target company is located and have it conduct an exchange offer in which the Japanese parent’s stock is offered pursuant to the tender offer regulations of the jurisdiction.
- Consideration for the exchange offer can be the acquirer’s stock or a combination of the acquirer’s stock and cash.
(2) Legal consequences of the special measures
- In the case of an exchange offer to which the special measures apply, no review by a court-appointed inspector is required (see 1(ii) above), and neither the target company’s shareholders nor the Japanese acquirer’s directors are under any obligation to compensate the Japanese acquirer for a significant decline in the value of the target company’s shares (see 1(i) above).
- Under the special measures, no approval by the acquirer’s shareholders is generally required for the issuance or reissuance of the acquirer’s shares in connection with an exchange offer (see 1(iii) above), as long as the product of the net asset amount per share multiplied by the number of shares to be delivered to the tendering shareholders of the target company does not exceed one-fifth of the net asset amount of the acquirer. Note that, in the case that a combination of stock and cash is offered as consideration, the cash portion is not counted toward the one-fifth threshold. As an exception to the foregoing, if a designated number of the acquirer’s shareholders (generally one-sixth or more of all voting shareholders) notifies the acquirer of their opposition to the proposed exchange offer within the requisite period, a super-majority (two-thirds) approval of shareholders is required to approve the issuance or reissuance of the acquirer’s shares in connection with an exchange offer.
- In addition, to afford protection to a Japanese acquirer’s shareholders opposed to a proposed exchange offer, such shareholders have the right to require the acquirer to purchase their shares at a “fair price” subject to certain conditions.
3. Issues that remain to be addressed
Although the amendment to the Law discussed above is an important step forward toward increasing the use of exchange offers by Japanese firms in which their stock is offered as consideration, there remain Japanese tax, securities law and other issues arising from such exchange offers. For example, the Japanese tax code does not allow for the deferral of capital gains tax on the part of the target company’s Japanese shareholders who tender their shares in exchange for the offered shares of the acquirer, which may act as a disincentive for the use of exchange offers. These remaining issues must be further discussed and addressed in order to provide Japanese companies with the assurances they need to make use of their stock as acquisition consideration in acquiring a domestic or foreign entity.
XBMA – Quarterly Review for Q1 2011
The attached slides summarize trends in cross-border M&A and strategic investment activity throughout the first quarter of 2011.
Highlights:
- Global M&A volume for Q1 2011 was US$671.8 billion, up 29.5% as compared to Q1 2010.
- Cross-border transactions have rebounded substantially from 2009: 38% of Q1 2011 global M&A was cross-border — up slightly from 37% in 2010 and up significantly from the low of 26.8% in 2009.
- Canada and Australia’s shares of global M&A each more than double their respective shares of world GDP, perhaps reflecting the large number of deals involving natural resources.
- Distressed deals have exceeded US$75 billion per annum since 2009.
- Energy M&A remains the most active among cross-border transactions – reflecting the ongoing pressure to acquire natural resources to fuel emerging economies and the churn created by political instability in the Middle East and by the widespread adoption of technological improvements in the natural gas industry – with Materials and Financials cross-border M&A in the second tier.
XBMA Quarterly Review for Q1 2011