Public Comment to the METI Fair M&A Study Group (by Nicholas Benes)

As the person who initially proposed the Corporate Governance Code to the LDP in 2013 and 2014, I am well aware of its limitations in various areas. For this reason, I am very pleased that Fair M&A Study Group have decided that its discussions should cover not only MBOs, but also ”cases which are likewise significantly affected by the issues of conflict of interest and information asymmetry”[1], including “cases of acquisition of a controlled company by its controlling shareholder.”[2]

This indeed an important mission, because these topics include virtually all types of M&A transactions and the public statements of executives and boards with regard to them. For many years in the post-war era, the failure of the government and the JPX/TSE to set forth clear bright-line rules that facilitate a fair, robust M&A market in Japan has stunted productivity, dynamism and growth in the Japanese economy.

Amended, Detailed Public Comment by Nicholas Benes to JPX re: “Review of the TSE Cash Equity Market Structure”

NOTE:  This public comment supersedes and replaces the one that I, Nicholas Benes, submitted on January 12, 2019)

As the person who initially proposed the Corporate Governance Code to the LDP in 2013 and 2014, and suggested a number of principles in it, I am well aware of its limitations in various areas and the fact that Japan has not yet attained the quality level for an equity market that is expected by global investors. In this sense I am very pleased that the JPX has decided to review its equity market structure and related standards.

Challenges and Realities

This indeed an important mission, for which is it essential to recognize and discuss the impact of a number of challenges that Japan faces in improving governance, efficiency, and trustworthiness of its equity capital markets. These challenges include:

Japanese Minority Shareholder Cash Out Transactions — Supreme Court Decision on Share Price (Jones Day Tokyo)

On July 1, 2016, the Supreme Court (first petty bench) issued a decision (the “Decision”) that may have a material impact on Japanese M&A practice.
The Decision involves the determination of the price for callable shares (zembu shutoku joko tsuki shurui kabushiki) redeemed by a target company to cash out minority shareholders after a tender offer by an acquirer.

Corporate Governance Articles in the Newsletter of the Institute of Social Research, University of Tokyo, March 2016

Corporate Governance

”Social Science Japan newsletter 54 takes up where it left off last issue and continues to explore the theme of governance. This time, the focus is on corporate governance. Six ISS scholars discuss the topic from various angles.

Tanaka Wataru summarizes the ISS research project and the book that inspired this issue’s featured theme. He explains what corporate governance entails and the history of its transformation in Japan. Cato Susumu analyses the dynamics of the wage structure in firms and shows how firm-specific human capital affects wages under a seniority system. Focusing on middle managers as actors in corporate governance, Owan Hideo looks at how they affect firm productivity and what measure can be used to evaluate their performance. Sasaki Dan highlights the concurrent passage, in 2014, of amendments to corporate and school educational law and argues that the reforms have reduced autonomy and increased externally-imposed or topdown control. He raises concerns about the consequences of mandating the inclusion of “neutral,” external members to the executive boards of large corporations. Nakamura Naofumi and Nakabayashi Masaki explore corporate governance in its historical context.

Daniel E. Wolf et al :”Social Covenants in Mergers: Legal Promises or Moral Commitments?”

‘With the return of acquirer stock as a featured form of consideration in many recent deals, dealmakers are once again focusing on “social” issues in striking a merger agreement. As compared to most straight cash takeovers where price garners the overwhelming share of, if not exclusive, attention, an acquisition featuring stock consideration, and especially a so-called merger-of-equals, often involves significant discussion between the parties of softer issues, including governance, board composition, management, people, and corporate identity (e.g., corporate and brand names, headquarters and facility locations, and charitable and community commitments). A number of deal developments over the last few years highlight some of the risks and considerations unique to these social terms.

Terry Lloyd: ”Sharp: How Not to Sell a Company in Japan”.

japaninc

E-biz news in Japan

”Late last week, Mr. Terry Gou, the CEO of Foxconn Technology Group (also known as Honhai) signed a JPY389bn deal to take control of Sharp, one of Japan’s bedrock electronics firms. The signing came after a protracted cat-and-mouse game played between Mr. Gou, the management of Sharp, and in the wings, the public-private INCJ fund. Mr. Gou showed consummate deal sense in luring Sharp’s board with a much more attractive offer than the government’s INCJ (which wanted to break up the firm) then drag out the negotiations as Sharp was facing a possible collapse. Lastly, with impeccable timing he sprang a last minute demand to reduce the deal price by 20% and completely out-maneuvered, Sharp’s executives and shareholders, who eventually caved in and agreed.

”Carlyle Steps Up Japan Deal Pace as Governance Reform Kicks In”

”Carlyle Group LP, which has made two acquisitions in Japan so far in 2016, said it plans to add another one or two deals there this year as companies get serious about boosting their profits.

Nikkei Asian Review: ”Japanese company needs to drop arrogant stance to survive”

Sharp’s head office in Abeno Ward, Osaka

”………………TOKYO — Sharp decided Thursday to accept a takeover offer from Taiwan’s Hon Hai Precision Industry, becoming the first major Japanese electronics maker to be acquired by a foreign company.

While Sharp will seek to resurrect itself under the umbrella of the Taiwanese contract electronics manufacturer also known as Foxconn, the key to successful rehabilitation will be the ability of the Osaka-based company to drop its arrogant stance.

Forbes: ”The Acquisition Of Japan’s Sharp By Taiwan’s Foxconn’s Historical Significance”

Sharp Foxconn

”The outcome of the acceptance by Japanese electronics giant Sharp of a USD $4.3bn takeover bid by Taiwanese multinational Foxconn remains to be seen. Its symbolic significance however could be quite extraordinary: will Japan’s notoriously insular economy, notably its notoriously ultra-insular electronics industry, be opening up to the outside world and especially to its East Asian neighbors?