*Originally distributed on February 26, 2024. 

In July 2023, Nidec Corporation, the largest motor manufacturing company in the world and listed on the Tokyo Stock Exchange (“TSE”) Prime Market, proposed to acquire and take private Takisawa Machine Tool Co., Ltd., which specializes in manufacturing machine tools and is listed on the TSE Standard Market. Remarkably, Nidec aimed to secure control over Takisawa without obtaining approval from Takisawa’s management, as it sought to make the acquisition through a public tender offer. This transaction marked the first application of the “Guidelines for Corporate Takeovers,” issued by the Ministry of Economy, Trade and Industry of Japan (“METI”) on August 31, 2023, known as the “Takeover Guidelines,” to a proposed unsolicited takeover. Ultimately, Nidec successfully completed its unsolicited acquisition, and this transaction already has begun to significantly influence the mergers and acquisitions landscape in Japan.

Corporate Governance Reforms

The traditional shareholder structure of Japanese companies often features a significant presence of management-friendly shareholders, including business partners and domestic institutional investors like banks and insurance companies, which typically support company management by not opposing their business proposals. This, along with a lack of qualified independent directors, has led to concerns about diminished market discipline and poor capital efficiency. Additionally, there has been some criticism over listed subsidiaries prioritizing parent and group company interests over those of minority shareholders. Recent Japanese government reforms, such as the introduction of corporate governance and stewardship codes, have aimed to tackle these issues and enhance the reputation of Japan’s public equity market.

In August 2023, in another measure consistent with promoting the goals of reform, METI formulated and announced the Takeover Guidelines to facilitate socioeconomic acquisitions. METI made it clear that its policy is to encourage “desirable acquisitions” in line with these Takeover Guidelines. A summary of the Takeover Guidelines is as follows:

• There have been an increasing number of transactions in Japan where acquisition proposals induce other options (i.e., competing buy-out proposals) from third parties that result in divergent opinions over the evaluation of multiple competing proposals. This trend is raising complex issues that the target company’s board of directors must consider and deal with.[1]
• At the same time, the percentage of institutional investors opposed to the adoption of takeover defense measures has increased significantly since 2017, and the number of Japanese companies that have adopted such anti-hostile takeover measures has continued to decline. In addition, there have been more court decisions rendered concerning a company’s adoption and use of takeover defenses when faced with a possible acquisition.[2]
• Despite a growing awareness of the need for Japanese companies to improve their corporate value over the medium- to long-term and their capital efficiency, currently there are more listed companies in Japan with a price-to-book ratio below 1x compared to many other countries. More than ever, M&A is expected to be used as a corporate strategy to tackle increasingly complex business challenges.[3]
• Establishing a fair Japanese M&A market promotes sound operations, boosts corporate growth, and enhances shareholder value. It also enables better strategic choices for companies and improves management discipline. This activity optimizes resource use, accelerates industry restructuring, and revitalizes Japan’s economy, benefiting society at large.[4]

Clear Statement of the Government of Japan’s Policy to Promote Desirable Acquisitions

The Takeover Guidelines are based on the quantitative concept of securing and improving “corporate value and, in effect, the common interests of shareholders” (i.e., takeover price), and are designed to ensure that such acquisitions are not unreasonably prevented by the target’s management. For this purpose, “matters relating to the control of the company should be based on the reasonable will of the shareholders,” and “useful information for the shareholders’ judgment should be provided appropriately and actively by the bidder and the target company. For this purpose, the bidder and the target company should ensure transparency regarding the acquisition through compliance with laws and regulations related to the acquisition.”[5]

Under the Takeover Guidelines, the board of directors to which the matter is submitted should, in general, give “sincere consideration” to a “bona fide offer.” In doing so, the purchase price and other transaction terms should be seriously examined by the board. If an increase in corporate value can be reasonably expected from the acquisition proposal, as suggested by a purchase price that is considerably higher than the historical stock price level, each director and the board of directors should give the proposal due consideration.[6]　Takeover response policies, initiated by companies during unsolicited acquisition attempts, can pose risks by potentially blocking economically justified acquisitions or being misused by poorly managed companies. Addressing these concerns is essential for fairness and transparency. [7] [8]

Although those policies are common sense and nothing special from the viewpoint of global market discipline, because Japanese corporate law governing duties of directors and executive officers of listed companies lacks the concept of “fiduciary duty” owed to their shareholders, the Japanese government has dared to provide the discipline though the formality of “soft law.”

Process Leading to the Successful Completion of the Tender Offer for Takisawa Shares

Nidec publicly announced its intention to proceed with an unsolicited tender offer without the condition of obtaining consent from Takisawa, taking into account, among others, the following factors:

1. Nidec sought to explain the significance of this transaction both to Takisawa and the market as clearly and specifically as possible.
2. As a condition of its tender offer, Nidec determined that:  (a) its tender offer price should include a significant premium over Takisawa’s market share price;  (b) should the total number of shares tendered reach or exceed the minimum planned purchase quantity, Nidec would acquire all tendered shares without setting an upper limit, while also establishing a minimum threshold to prevent any form of coercion; and (c) sufficient time would be provided to both shareholders and the Takisawa board of directors to consider and examine the Nidec proposal, thereby safeguarding the shareholders’ ability to make well-informed decisions.[9]
3. Nidec had previously submitted a bid for control of Takisawa in early 2022, leading to a conflict with Takisawa’s board. Takisawa’s defensive measures may be aimed at preserving current management.
4. Although current law does not specify the contents of a timely disclosure of the information to be included in the prior notice of a tender offer, in order to be transparent, Nidec would expressly provide in its tender offer’s prior notice the information that meets the criteria for timely disclosure when the tender offer actually begins.
5. If the commencement date of a tender offer is uncertain or if obtaining regulatory approval under competition and other laws within the announced period is unlikely, it could erode investor confidence and increase the likelihood that Takisawa would seek to adopt defensive measures. Therefore, Nidec concluded that it would be imperative to begin the necessary regulatory clearance processes early to ensure all approvals are globaly secured before the tender offer period ends.[10]

One consideration taken into account by tender offerors when determining the number of shares to be purchased in their offer is the two-thirds voting rights threshold necessary for a special resolution of the shareholders meeting to approve the share consolidation (in accordance with the requirement in the Companies Act of Japan) which typically follows a successful tender offer to squeeze out remaining minority shareholders. If the minimum number of shares sought to be purchased in the tender offer is less than this two-thirds amount, theoretically (though not realistically) the offer might be considered to be “coercive,” forcing shareholders to tender so as to not miss out on the deal. To mitigate this “theoretical” concern in its tender offer, Nidec employed a number of steps, including having measures to extend the tender offer period, if appropriate, and announcing its intention to acquire additional shares if tendered.

A special committee, comprising individuals external to and independent of Takisawa’s management and operations, ultimately issued a concurring opinion and recommendation regarding Nidec’s proposed takeover to Takisawa’s board of directors. The tender offer, initiated in September 2023, successfully concluded in November 2023, with approximately 86 percent of Takisawa’s shareholders tendering their shares. Takisawa was delisted in January 2024 and has become a wholly owned subsidiary of Nidec through squeeze-out procedure (share consolidation) in February 2024.

For regulatory authorities to assess notifications regarding competition laws and foreign direct investment regulations, it is generally essential to have cooperation from the target companies in supplying specific information about themselves. However, during an unsolicited takeover process, the acquiring party might have to proceed without the approval (and therefore, without cooperation) of the target company’s board, leading to a situation where various challenges can arise. In the context of unsolicited takeovers in certain countries, the level of detail about the target company that needs to be disclosed to regulatory authorities remains ambiguous under existing statutes and regulations, with no clear precedents to follow. Given that this transaction was launched as an unsolicited takeover, Nidec undertook thorough advanced reviews and consultation with local legal counsel and regulatory authorities in the jurisdictions concerned to determine the scope of information that ought to be disclosed to the authorities.[11]

Impact of this Transaction on Japanese M&A Transactions

Following the successful completion of Nidec’s tender offer for Takisawa shares, there is now a growing trend in Japan for companies to actively consider unsolicited acquisition proposals to expand their businesses. For instance, in November 2023, M3, Inc., a company listed on the TSE Prime Market, initiated a tender offer for shares of Benefit One Inc., also listed on the same market. Subsequently, in December 2023, Dai-ichi Life Holdings, Inc., another entity listed on the TSE Prime Market and a traditional, blue-chip and large-scale financial institution, announced its countering intention to also launch a (competitive) tender offer for Benefit One shares at a higher price, provided, however, that its offer would be contingent upon approval from Benefit One and its parent company, Pasona Group Inc., in accordance with the Takeover Guidelines. After negotiations with Dai-ichi Life, Pasona determined that Dai-ichi Life’s tender offer was more financially advantageous than M3’s and agreed to Dai-ichi Life’s proposal. In February 2023, Dai-ichi Life proceeded with the tender offer for Benefit One’s shares following an endorsement from Benefit One’s board and a recommendation for shareholders to tender.

The transactions involving Takisawa and Benefit One clearly illustrate a future trajectory where, by following the Takeover Guidelines, the number of successful unsolicited takeovers in Japan will increase. Relying on the Takeover Guidelines is expected to not only streamline the acquisition process but also increase the possibility that these takeovers are conducted in a manner that is beneficial to all parties involved. As a result, it is expected that the Japanese equity market should likely see a revitalization of interest and activity in desirable takeovers, leading to a more robust, competitive, and dynamic corporate landscape. This shift will encourage a healthier market ecosystem, where companies are better positioned to pursue growth and innovation through strategic acquisitions, ultimately contributing to the overall vitality and competitiveness of the Japanese economy.

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[1] Ministry of Economy, Trade and Industry, “Guidelines for Corporate Takeovers” (Aug. 31, 2023), § 1.1, https://www.meti.go.jp/press/2023/08/20230831003/20230831003-b.pdf

[2] Id., § 1.1.

[3] Id., § 1.1.

[4] Id., § 1.2.

[5] Id., § 2.1.

[6] Id., § 3.1.2.

[7] Id., § 5.1.

[8] While METI discussed the Takeover Guidelines, the Financial Services Agency’s Financial System Council Working Group started considering revisions to the tender offer process in June 2023. By December 2023, recommendations of this Working Group included mandatory additional tender periods post-successful offers, alongside a proposal allowing bidders to voluntarily extend these periods to address coerciveness.

[9] Nidec has held the belief that, by making Takisawa a wholly owned subsidiary, there would be a high likelihood of realizing various synergies, thereby maximizing the corporate value of both companies. In addition, Nidec made its tender offer price attractive from the viewpoint of securing shareholder profit, by adding a premium of more than 100% to the average closing price of Takisawa’s shares for the past one month, three months, and six months, based on the date before the announcement date.

[10] In the tender offer process, Nidec received various calculations from the tender offer agent and based on this information determined that the minimum number of shares to be purchased would be 50% of voting rights. During this decision-making process, Takisawa’s shareholder population was taken into consideration, with a particular focus on the presence of passive index funds, shareholders holding for policy purposes, and the attitudes of Takisawa’s employee stock ownership association, directors, and clients’ stock ownership association. According to the calculations received, it was anticipated that the requirement for the approval (at the shareholders meeting after the closing of the tender offer) of share consolidation following the offer (two-thirds) would be met, even if, following the successful tender offer, the number of shares held by Nidec was close to the lower limit of the planned purchase amount (50%). Nidec announced that it made this strategic decision of the minimum shares sought in the tender offer based on detailed deliberation and calculations.

[11] TMI, serving as global lead counsel to Nidec, was involved in extensive discussions with the regulatory authorities about the acquisition structure and the anticipated timeline in Japan. By closely coordinating with local counsel in each country, Nidec was able to timely obtain regulatory clearance (including from the Committee on Foreign Investment in the United States (CFIUS)), enabling a quick closing of the deal.