Sceptics claim that the clustering tactic is now being used to thwart genuine shareholder activists seeking to press their case for improved corporate governance. Whatever the truth, this year’s congested proxy season is especially noteworthy as the year of the poison pill defence scheme.
According to research by HSBC, by the end of 2006 a total of 172 companies in Japan had already installed some form of takeover defence mechanism since they were first permitted in 2004. HSBC reckons that as many as 350 Japanese companies are planning to introduce pills in this year’s round of meetings.
There appear to be several reasons for the move. First, M&A activity in Japan is on the rise. HSBC calculates that there were 2,776 M&A deals in Japan in 2006 compared with 621 in 1985. Of last year’s deals, 78% were purely domestic transactions and 64 were public takeover bids, all meaningful increases in activity over previous years. Growing by acquisition no longer carries the stigma in corporate Japan that it once did.
Second, the introduction of the so-called triangular M&A law in May is expected to increase foreign takeovers in Japan. The law permits foreign companies to merge Japanese companies with their existing Japanese subsidiary but using their own shares as consideration, which was previously forbidden. The advent of the law has been used by management at many Japanese companies, alarmed at the prospect of increasing hostile foreign takeovers, as a justification to install poison pills. That, however, seems disingenuous: share-for-share mergers as contemplated by the new law seldom work on a hostile basis.
Third, an increase in foreign shareholder activism, which is often aggressive, has alarmed incumbent management at many potential targets.
Management motivation
With all this activity by Japanese companies apparently aimed at preventing foreign hostile takeovers, it is tempting to draw the conclusion that corporate Japan is returning to its xenophobic old ways.
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“It’s extraordinarily important to look at the details of takeover defence plans. If you do your homework on takeover defences globally, there is evidence that such measures can provide shareholders with an uplift in value” Scott Callon, Ichigo |
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That would be an oversimplification, says Scott Callon, partner and CEO of Ichigo Asset Management in Tokyo. “It’s extraordinarily important to look at the details of takeover defence plans,” he says. “If you do your homework on takeover defences globally – and we do – there is evidence that such measures can provide shareholders with an uplift in value.” Callon’s argument is that if the defence scheme has the effect of slowing down the processing of an aggressive bid, it provides management with more time to consider alternative schemes to extract greater value for shareholders, including the possibility of a white knight bidder and/or the launch of an auction for the company.
That sounds fine in theory but assumes as its premise that management teams in many Japanese companies are genuinely motivated by a desire to maximize shareholder value rather than saving their jobs.
Ichigo for one is prepared to give some managements the benefit of the doubt. A 20% shareholder in steel-maker Tokyo Kohtetsu, Ichigo thwarted management’s proposal to merge with Osaka Steel in February but will vote in favour of the company’s proposed takeover defence plan at the forthcoming general meeting.
“We think the Tokyo Kohtetsu plan is fine,” says Callon. “We set very strict standards to approve these plans.”
These include an immediate shareholder vote on the proposed defence plan, a “sunset” provision to ensure the proposals last only one year without a fresh shareholder vote and an independent committee to adjudicate on the nature of any hostile bid and to oversee the implementation of the defence mechanism.
The last point seems crucial, since, in the case of the Tokyo Kohtetsu plan, the decision to launch a large equity issue to dilute a potential hostile bidder that is seeking to acquire more than 25% of the company rests solely with the independent committee.
Although Ichigo has given the nod to one plan, it is by no means giving blanket approval. Also a 20% shareholder in auto parts maker Nikki Co, Ichigo has decided to vote against the company’s defence plan, since it violates the fund manager’s guidelines.
“They’ve come up with a plan that we can’t support,” says Callon, “it’s got a three-year life and that’s just way too long. We had a number of discussions about it and we’d prefer to vote with management. Unfortunately, that’s not possible this time.”
With a 20% stake, Ichigo might have the firepower to thwart Nikki’s proposal but it is not certain. The issue of takeover defence plans is so new in Japan that there is virtually no legal precedent of a challenge by shareholders to their grant. Callon reckons that although plans might be voted through on a simple majority for now, as and when shareholders decide to launch a challenge, the courts will rule that a super-majority of two-thirds will be required to legitimize such proposals.
The first legal challenge is on its way. US activist fund Steel Partners, the scourge of several Japanese boards already, has challenged the legality of takeover defences set up by Bull-Dog Sauce Co in the light of Steel Partner’s hostile takeover offer. The outcome of that challenge might prove pivotal in dictating whether the management teams of Japanese companies really are able to defend against hostile takeovers or whether what is being achieved is little more than window dressing.
