JAPANESE UPDATE – Japan’s Largest M&A Transaction in 2023: The Acquisition of Toshiba Corporation

*Originally distributed on February 20, 2024. 

In 2023, there was a 6.7% decline in the number of mergers and acquisitions involving Japanese companies as compared to 2022. This decrease can be attributed to a combination of macroeconomic factors, interest rate trends, regulatory changes, and geopolitical influences. Despite this overall trend, one standout deal was the acquisition of Toshiba Corporation (“Toshiba”) by a consortium led by Japan Industrial Partners, Inc. (“JIP”), with a deal value of approximately JPY 2 trillion (USD 13.8 billion). This transaction marked the largest Japanese M&A deal in 2023 and set a record for deal value in going-private transactions by private equity funds involving listed Japanese companies.[1] [2] This memorandum describes some of the noteworthy elements of the transaction.

In March 2023, the Tokyo Stock Exchange (“TSE”) issued a request for action, urging listed companies to implement management strategies mindful of the cost of capital and stock price. In January 2024, the TSE began publishing a list of companies that took action in response to its request. In August 2023, the Ministry of Economy, Trade and Industry of Japan released the “Guidelines for Corporate Takeovers” with the aim of encouraging and promoting acquisitions that enhance corporate value and secure the interests of shareholders. These developments signaled a change not only in Japan’s market environment but also in its regulatory landscape. On the financial side, there has been increasing pressure from activists and capital markets demanding greater discipline from Japanese listed companies. One result of the combination of these influences has been the rise in instances where companies strategically opt for privatization. This often involves the acquisition of shares from existing shareholders through tender offers, fostering the structural reforms from a medium- to long-term perspective that both regulators and market participants are seeking. In 2023, there were approximately 80 tender offers in Japan, reaching a total purchase price of approximately JPY 5.6 trillion, a record high. Noteworthy are the instances where both domestic and foreign investment funds took the lead in privatization initiatives, including most notably with respect to Toshiba.

While historically Toshiba had long been a widely respected and admired industrial company, one of the exemplifiers of Japanese economic prowess, in recent years it had some prominent problems. In 2015, accounting fraud engaged in by management came to light and subsequently it was revealed that Toshiba had suffered substantial losses in the nuclear power plant business of Westinghouse, which Toshiba had acquired in 2006. This discovery triggered a series of events affecting Toshiba’s financial health and its management. First, the company was faced with threatened delisting from the TSE because of its excessive debt position; in response, Toshiba sold off its computer chip business (Toshiba Memory Corporation) and accepted new capital from overseas investors, including a number of activists, in order to maintain that listing. Thereafter, there were multiple changes in leadership. This background, perhaps unsurprisingly, resulted in activists and others clamoring for something to be done to restore the company’s value and reputation. As a business group of immense importance to Japanese society and industry, Toshiba found itself at a critical juncture. There were no easy solutions, however: Toshiba is a massive enterprise, with a total of more than 250 consolidated subsidiaries and approximately 130 equity-method affiliates operating in a wide range of businesses in Japan and globally.[3] In the Spring of 2022, Toshiba’s board of directors established a special committee to conduct a strategic review, including consideration of a going-private transaction by soliciting bids from serious candidates.

JIP was an early bidder, viewing Toshiba as an opportunity, and took on the mission of establishing a stable management structure for Toshiba. The overarching goal was not only to rectify and overcome past challenges but also to facilitate swift implementation of new growth strategies. This endeavor aimed to position Toshiba with a trajectory towards stability and renewed success. JIP devoted considerable resources towards proposing a compelling transaction to Toshiba.

Consortium of Investors

From the very early stages of communication with Toshiba’s special committee overseeing the bidding process, it was apparent there was to be a strong emphasis from Toshiba on “deal certainty”: a speedy and secure closing was of paramount importance. Apparently, this was because Toshiba previously had considered acquisition proposals that, when examined more closely, lacked prompt government clearances or reliable LBO financing commitments, and which ultimately were unreliable. In order to seek to address this concern, JIP took strategic measures in designing its acquisition bid. In addition to considering how best to structure JIP’s bid, the composition of its investor consortium and the allocation of commitment amounts all were evaluated with a view towards facilitating obtaining clearance under competition laws and, notably, foreign direct investment (“FDI”) regulations in the numerous jurisdictions in which Toshiba operates. The consortium’s structuring and participants were intentionally selected to mitigate any concerns that could be thought to impede competition in certain trade areas or to raise national security concerns. Through these measures, JIP aimed to avoid, as much as possible, surpassing thresholds requiring filings. Even when filings needed to be made, JIP sought to minimize stay or waiting periods by adopting appropriate measures that would not raise concerns from the reviewing authorities, thereby reducing the need for substantive and successive examinations. The period for preparation to obtain clearances totaled more than six months, which, given the magnitude and complexity of the deal, is extremely short.

Merger Agreement

In Japan, it is typically challenging for a tender offeror to secure LBO financing commitment from lenders unless the target company’s management agrees to proceed with the tender offer. Moreover, unless the target company’s management recommends that shareholders tender their shares in the tender offer, it is uncommon for funds, such as index-linked passive vehicles, as well as other financial and institutional investors to actually tender their shares in the tender offer.

Hence, from the buyer’s standpoint, obtaining management’s approval for the tender offer stands as a crucial condition precedent in the merger agreement. Ideally, the recommendation to shareholders to tender also should be incorporated into the condition precedent. However, due to Toshiba’s emphasis on deal certainty, the inclusion of conditions precedent for initiating the tender offer in the merger agreement was perceived as a drawback in the competitive bidding process.

Consequently, three significant negotiation points arose in the context of the merger agreement: (i) whether to include a recommendation to shareholders to tender their shares in the tender offer as a condition precedent, alongside management’s publicly stated approval of the tender offer; (ii) on the supposition that obtaining certain regulatory clearances would be needed, what the deadline for obtaining such clearances and launching the tender offer should be; and (iii) the level of penalty, in the form of a reverse breakup fee (an “RBF”), that Toshiba was seeking in the event the transaction terminated due to failure to obtain regulatory clearances by the deadline.

RBFs remain very rare in Japan. As far as we know, the acquisition of Toshiba Memory Corporation (an unlisted company and formerly a Toshiba subsidiary, currently operating under the name of KIOXIA Corporation) by funds sponsored by Bain Capital has been the only large-scale transaction involving a Japanese company where a RBF was specified in the deal terms. JIP’s acquisition of Toshiba was the first transaction of a listed Japanese company in which an RBF was specified in the merger agreement. Toshiba’s position was that an RBF was absolutely needed in order to make the buyer strongly commit to obtaining clearances. If the RBF was set too low, it would be the same as allowing the buyer a walk-away option; accordingly, the RBF was intended by Toshiba to be more like a penalty than a liquidated damages-type amount for its incurred deal expenses – again, deal certainty being one of Toshiba’s priorities. Conversely, from JIP’s point of view, even though it expected it could obtain clearances, JIP faced cultural challenges in convincing investors to agree to a merger agreement that included an RBF.

Advice was received from US and UK co-counsel regarding the RBF, given its more prominent use, and history, in those markets. Finally, JIP successfully obtained certain commercial protections, including the establishment of specific situations where the obligation to pay the RBF would be excused. To increase the likelihood that shareholders would tender their shares in the tender offer, JIP secured the inclusion as a condition precedent that a specific resolution be adopted the board of directors meeting considering the tender offer. This resolution required the directors to state that the tender offer price is reasonable (even though the directors were not required to explicitly recommend that shareholders tender their shares). JIP also successfully incorporated an obligation for Toshiba to cooperate with the buyer in its efforts to enter into a tender offer and support agreement with Toshiba’s major shareholders.

Tender Offer and Financing Structure

In March 23, 2023, following the conclusion of the merger agreement, JIP publicly announced its intention to acquire all of Toshiba’s shares by way of a tender offer and subsequent squeeze-out procedures (i.e., through a share consolidation process) through a consortium supported primarily by many major Japanese companies and banks. In connection with this announcement, Toshiba announced that its board of directors meeting resolved to express support for the tender offer in the event that the tender offer was commenced. In June 2023, Toshiba further announced that in the event that the tender offer was commenced, Toshiba would not only support the tender offer itself but also recommend that shareholders tender their shares in the tender offer. Throughout this period, JIP received information and other cooperation from Toshiba, allowing it to make merger and FDI filings in the relevant jurisdictions. After successfully obtaining all of the necessary clearances, JIP launched its tender offer in early August 2023, finally acquiring 78.65% of the tendered shares. The tender offer reached its successful conclusion the following month. Consequently, in December 2023 Toshiba was delisted from the TSE and, through the subsequent share consolidation process, became a wholly owned subsidiary of JIP.

In LBO financing transactions in Japan, OpCo typically obtains senior and mezzanine loans, with the senior and mezzanine financiers entering into a creditors agreement regarding the priority-subordination relationship. In 2022, the Marelli (which was controlled by KKR) insolvency shocked the Japanese loan syndication market, particularly as many regional banks had to make an allowance for their LBO loan holdings to this debtor; as a result, many regional banks reduced their participation in LBO lending, becoming more conservative in their credit decisions. More recently, there has been an increase in cases where HoldCo procures loans that are subordinated to senior loans by taking advantage of structural subordination between creditors and shareholders. In the Toshiba transaction, the HoldCo structure was adopted in order to optimize the leverage ratio at the OpCo level, since the senior loan was large. In addition, some of HoldCo’s mezzanine financiers sought guarantees from OpCo and the Toshiba Group, leading to the need for an agreement on the priority-subordination between senior lenders and mezzanine lenders for guarantee claims against the Toshiba Group. Consequently, the priority-subordination relationship between lenders in the Toshiba transaction reflects both structural subordination and contractual subordination.

Merger and FDI Filings and Regulation

As is often the case with large-scale global M&A transactions, in certain jurisdictions, the examination process for merger filings and FDI filings can be notably prolonged, creating challenges in predicting clearance timing. Furthermore, some countries recently introduced new laws relating to merger filings and FDI regulations, resulting in the potential for extended and unpredictable examination periods. Given Toshiba’s emphasis on deal certainty, it became important for JIP to do what it could to minimize the uncertainty associated with regulatory examinations so as have the transaction proceed in accord with its intended schedule. As noted earlier, JIP’s goal is to revitalize Toshiba, and it placed an emphasis on finding Japanese investors that could seek to accomplish this on an all-Japan basis. Still, the consortium could not be formed only with Japanese investors, and so with respect to non-Japanese investors, JIP strategically structured their participation to facilitate the clearance processes in view of the geopolitical risks potentially implicated and ensuring compliance with competition laws, FDI considerations, and other regulations. As a result, JIP was able to close the deal in a much shorter period of time compared to other projects of similar size.

If clearances from regulatory authorities for the acquisition of shares through the settlement of a tender offer have not been obtained prior to commencement of the tender offer, the Financial Services Agency of Japan and the Kanto Local Finance Bureau tend to make numerous inquiries about the tender offeror’s expectations regarding obtaining the clearances during the tender offer period. It is essential in Japan that although it is not stipulated in laws and regulations, the tender offeror should be well prepared for this process and participate in consultations with these authorities prior to commencement of the tender offer. Further, the offeror should have a compelling explanation for the prospects and timing of obtaining clearances to provide to these authorities. For example, for Toshiba, the merger filing law in Egypt was amended from a post facto report to prior notification. However, as the enforcement regulations had not been adopted by the Egyptian Competition Authority, the relevant authority (“ECA”), at the time of the commencement of JIP’s tender offer, a merger filing to the ECA was not possible before commencement of the tender offer. Accordingly, when launching the tender offer, JIP obtained (i) confirmation from the ECA that, until the enforcement regulations were in place and in force, prior notification would not be required for the tender offer and the consummation of the tender offer would not violate the Egyptian Competition Law, and (ii) an opinion from an Egyptian law firm that it was unlikely for the enforcement regulations to come into force before the scheduled commencement date for settlement of the tender offer.

In merger filing procedures in certain jurisdictions, such as in Mexico and India, it is generally necessary to provide the authorities with details of the attributes and capital structure of the investors and the target business, including companies in which the buyer or the target has minority investment interests, the details of the transaction, and the market share of the buyer and the target in the relevant market. Consequently, it often takes considerable time to collect the information and have the filing documents formally accepted by the authority. Needless to say, close and patient negotiation with the authority via local counsel is indispensable to accelerate the review by the authority and obtain timely clearance.

As a result of increasing tightening FDI regulations, when companies engage in M&A transactions related to targets with global businesses, such acquirors increasingly need to seriously consider FDI regulations in multiple jurisdictions more and more from now on. As a general matter, transactions subject to FDI regulations are more diverse from country to country than merger filing regimes. It is crucial to emphasize that understanding the intricacies of FDI regulations in each jurisdiction requires a considerable amount of time. This is due to the broad discretionary powers held by authorities, and there is a lack of publicly disclosed examples of their implementation. The Toshiba transaction, at a fundamental level, simply involved the acquisition of its outstanding shares by a new purchaser; both the buyer and the target were Japanese, and there was no change in the direct shareholder of the non-Japanese subsidiaries. Many countries regulate the indirect acquisition of shares of companies that are operating in their borders, and Toshiba was no exception. Further, FDI regulations can be applied not only to the direct or indirect acquisition of a majority of voting rights, but also to the direct or indirect acquisition of 10% to 25% of any stake (not limited to shares or voting rights) or any governance rights, in certain countries. Given that Toshiba operates in sensitive business sectors, including semiconductors, across various countries, careful consideration and structuring of the transaction was necessary in terms of complying with FDI regulations.

When complying with FDI procedures, it also generally is imperative to furnish authorities with detailed information about the attributes and capital structure of the investors, the transaction specifics, and the details of the target business. All of this information may need to be specified in detail, so that they can withstand the authorities’ examinations. In M&A transactions by private equity funds, finalizing the capital structure of investors often takes time. With an increasing number of jurisdictions demanding comprehensive information as part of their FDI examinations, including for example the Committee on Foreign Investment in the United States (CFIUS), it becomes crucial to specify the capital structure and other pertinent information early on to withstand the authorities’ screening and to avoid creating unnecessary concerns due to any changes in information provided. To expedite the regulatory examination process for Toshiba, we collaborated with numerous local law firms, who assisted in offering the detailed transaction specifics to regulatory authorities, including conducting face-to-face presentations.

To give a sense of scale of these efforts in the context of the Toshiba transaction, prior to commencement of the tender offer, we conducted research on, and/or collaborated with various local law firms with respect to, approximately 129 jurisdictions for merger filings and approximately 114 jurisdictions for FDI filings. As a result, JIP successfully obtained merger filing clearances in 12 jurisdictions, and FDI filing clearances in eight jurisdictions prior to commencement of the tender offer. To our knowledge, to date, there has been no other transaction where such a significant number of FDI filing clearances for a Japanese tender offer has been obtained.

The landscape of M&A transactions in Japan is evolving, and the legal landscape domestically and internationally is becoming more complex and complicated in response to a variety of developments and sensitivities. Careful, strategic structuring and counseling, combined with deep experience and substantive legal knowledge, is necessary at each step of a transaction, from making a proposal to consummation of the deal.[4]


[1] According to RECOF Data Corporation, the aggregate value of M&A transactions involving Japanese companies announced in 2023 was JPY 17.9 trillion (a 52.2% increase from 2022), of which the aggregate value of domestic deals amounted to JPY 7.7 trillion (USD 53.1 billion) (an 85.1% increase from 2022). MARR Online No. 352 (January 4, 2024).
[2] TMI Associates served as global lead counsel for JIP.
[3] As of March 2023.
[4] It is essential that parties to M&A transactions retain experienced advisers who are committed to remaining at the forefront of the most important and significant business combinations, navigating these complex developments to serve the best interests of their clients with various levels of expertise.