Delayed for a year because of strong opposition from domestic firms frightened by the prospect of being taken over, the so-called triangular merger system becomes legal Tuesday.
The new system is expected to become another tool in the arsenal of firms seeking to initiate buyouts — especially cross-border mergers and acquisitions — in a country that has only until recently been resistant to foreign ownership.
What is a triangular merger?
A triangular merger refers to the acquisition of a local company through a share swap with a local subsidiary that is wholly owned by a foreign buyer.
Since this will allow a local subsidiary of a foreign company to use shares in its parent to purchase a Japanese firm, the system is expected to encourage cross-boarder M&As.
Once acquired, the shareholders of the targeted Japanese company will exchange their shares for stock in the foreign company.
Under Japanese rules, mergers between foreign and Japanese companies are not allowed, but with this method a foreign company can effectively absorb a Japanese company without using cash.
Triangular mergers are part of the Corporate Law that took effect last May, but strong opposition from Japanese businesses delayed the law’s provisions on triangular mergers until Tuesday.
Why did Japan introduce the system?
Japan is trying to encourage foreign direct investment to energize the economy. Lifting the ban on triangular mergers is one of the measures to expand investment opportunities from overseas.
Japan has pledged to double the amount of foreign investment in five years — from 6.6 trillion yen in 2001 to 13.2 trillion yen in 2006. The amount stood at 11.9 trillion yen as of the end of 2005. Japan now hopes to raise the proportion of foreign investment to its gross domestic product to 5 percent in 2010 from 2.2 percent in 2005.
Why was there a delay in introducing the new merger system?
Because foreign companies are in general more highly capitalized than Japanese firms, domestic companies feared that the introduction of the triangular merger system would make them vulnerable to foreign purchases. In response to the outcry, the government postponed the implementation to give companies time to develop antitakeover measures.
A recent survey by Nomura Securities Co. found that 206 listed companies, or roughly 5 percent of all listed firms in Japan, had adopted takeover defenses as of March 9.
In March 2005, it was reported that the hostile attempt by Internet firm Livedoor Co. to gain control of a small radio broadcaster — a bid that developed into a high-profile takeover battle with Fuji Television Network Inc. — sparked a panic that prompted the government to delay talks on approving triangular mergers.
Why were Japanese firms opposed to the system?
The Japan Business Federation (Nippon Keidanren) argues that Japan’s legal system is inadequate to defend companies and shareholders from hostile takeovers that may damage corporate value.
“If Japan is to expand M&A opportunities, the government should provide companies with the necessary regulations (so firms can fully prepare themselves) to adapt to the changing environment,” said Keidanren Managing Director Masakazu Kubota.
The nation’s most powerful business lobby has been calling for measures that would make it difficult for foreign companies to carry out triangular mergers.
Currently in Japan, a merger requires the approval of more than two-thirds of the shareholders with voting rights, but Keidanren has been pushing to establish tighter rules.
“In the U.S., a company’s board can adopt and exercise antitakeover measures without seeking approval from shareholders,” Kubota said. Triangular mergers are banned in the European Union.
Keidanren is also concerned about the potential leakage of technology abroad when big foreign companies swallow small Japanese rivals with great technical expertise.
Keidanren’s attempt to limit triangular mergers drew criticism from the American Chamber of Commerce in Japan and the European Business Council, which claimed the move by the Japanese business lobby would hinder foreign investment and hurt Japan’s economic growth.
Will the introduction of the new system trigger a rush of foreign hostile takeovers?
It remains to be seen. In theory, a triangular merger cannot be used for a hostile takeover because the deal is subject to approval by both the targeted company’s board and its shareholders.
However, Japanese businesses fear that a hostile takeover would be possible if a foreign company launches a public tender offer to acquire a majority share in a targeted Japanese firm, then installs sympathetic members on the board. If the foreign business can purchase more than two-thirds of the voting rights, carrying out a triangular merger will be possible.
However, considering how much cash would be required to pull off a takeover in this fashion, many M&A experts question whether such a tactic will be popular.
Will triangular mergers benefit the economy?
M&A experts say triangular mergers will accelerate industrial realignment.
“From a broad perspective, triangular mergers will have a positive impact on Japan’s economy,” certified public accountant Michio Minakata said, adding that the new system will expand options for M&As and help Japanese companies improve corporate value.
However, on the whole, Japanese firms are skeptical.
According to a survey by credit research agency Teikoku Databank Ltd. in late March, 64.6 percent of 9,736 firms said they believe triangular mergers will not help vitalize the economy.
Also, 46.4 percent of the respondents said that concerns outweigh expectations.
What will happen to the shareholders of a Japanese company who receive stock in the foreign purchaser?
If the foreign buyer is listed on a Japanese stock exchange, shareholders can trade their stock through a Japanese brokerage.
But because only about 30 foreign companies are listed here, most likely they will receive shares in foreign companies listed on stock exchanges elsewhere.
In that case, those shareholders may be inconvenienced because of the limited number of brokerages that handle foreign stocks.
Keidanren has warned that triangular mergers could undermine investor interests because laws and rules governing companies listed overseas differ from those in Japan. Shareholders may not be able to get the corporate information they expect due to differences in information disclosure standards.
To deal with such concerns, the government is obliging Japanese takeover targets to give shareholders information on foreign buyers.