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Difficulties of Hostile Takeovers in Japan.

Byline: Daigaku Murata


Since the economic bubble burst in the early 1990s the percentage of shareholding foreign investors and the number of individual investors have increased in the process of dissolving cross-shareholdings in Japan. With the gradual introduction of stock swaps holding company systems and triangular mergers since the end of the 1990s the legal and institutional basics for fostering mergers and acquisitions (MandAs) have also been consolidated. The number of MandAs mostly friendly ones has increased amid the process of these changes. However out-in MandAs (MandAs of domestic companies by foreign companies) and especially hostile takeovers remain few today in Japan.

Transition and Current Situation of Hostile Takeovers in Japan

Against the backdrop of changes since the economic bubble burst such as the unraveling of cross-shareholdings the rise of activist shareholders and the introduction of holding company systems and stock swaps the number of MandAs in Japan started to increase sharply in the late 1990s (Table). In particular the number of in-in MandAs (MandAs between domestic companies) has remarkably increased against the backdrop of industrial reorganization mainly to cope with intensifying international competition. Although MandAs involving Japanese corporations are largely accounted for by in-in MandAs as of 2013 out-in MandAs have grown by over five times from 1991 to 2013.

However the current market size of Japanese out-in MandAs is not so huge internationally. Total sales of cross-border MandAs around the world were about $349 billion in 2013. Regarding sales by nation the United States was the highest ($60 billion) and followed by the United Kingdom ($29 billion). Whereas Germany was about $17 billion France $9 billion and China $27 billion Japan was just about $4 billion and constituted only 1.2% of total global sales (UNCTAD World Investment Report 2014 Annex Table 09).

In particular hostile takeover attempts have mostly failed and the number of hostile takeovers remains very low. According to Jackson and Miyajima the total number of hostile takeover attempts from 1991 to 2005 was only six in Japan equal to Germany though the number was 176 in the UK and 332 in the US. Furthermore although the percentage of failed hostile takeover attempts was 17% in Germany 22% in France 39% in the UK and 47% in the US the percentage in Japan was quite high at 83% (Varieties of Capitalism Varieties of Markets: Mergers and Acquisitions in Japan Germany France the UK and USA by Gregory Jackson and Miyajima Hideaki RIETI Discussion Paper Series 07-E-054). The total number of hostile takeover attempts from 2006 to May 2011 slightly increased to 18 but most of them did not succeed (RECOF DATA Corporation MARR August 2011).

Increase in Takeover Defense Measures in Japan

As the threat of hostile takeovers has grown the number of corporations introducing takeover defense measures has rapidly increased since the mid-2000s. Though the number was only two as of 2004 it increased to 569 in 2008 (29 in 2005 175 in 2006 409 in 2007) (RECOF DATA Corporation MARR August 2011). The number slightly decreased against the backdrop of the bankruptcy of Lehman Brothers and improvement of legal systems on disclosure related to tender offers in Japan but the number remained 496 as of August 2014 (RECOF DATA Corporation MARR October 2014).

The number of management buyouts (MBOs) ultimate takeover defense measures for delisting also increased rapidly from 13 in 2000 to 34 in 2003 and additionally increased about three times within the next five years (96 in 2008). As with the introduction of takeover defense measures the number of MBOs also decreased from 90 in 2009 to 27 in 2012 but increased to 38 in 2013 (RECOF DATA Corporation MARR October 2014).

Long-Term Stakes Between Corporations and Stable Shareholders

Japanese corporations used to work on stable shareholder arrangements through cross-shareholdings before the bubble burst. Considering the decrease in the shareholding ratio of banks and business corporations and the increase in the ratio of foreign investors some people say the number of stable shareholders has also fallen.

However the existence and power of stable shareholders cannot be measured only by a decrease in the shareholding ratio of banks and business corporations. It is stable shareholders that support a corporation in situations such as shareholder meetings and hostile takeovers. Stable shareholders are made up of a combination of various stakeholders such as counterparty parent or affiliate companies main banks customers employees and life insurance companies. It is not unusual among Japanese corporations that employee or client stock ownership plans or life insurance companies account for a large or the largest amount of shareholdings.

In fact the percentage of stable shareholders in Japanese corporations is not low today. The Chart shows the transition of the ratio of stable shareholders in Japanese listed corporations and the samples consist almost entirely of large corporations with over 500 million yen in capital. The percentage of companies in which stable shareholders hold 50-60% of the shares has slightly decreased and has brought an increase in the percentage of companies whose stable shareholders hold 10-30% of the shares. However the percentage of corporations in which the ratio of stable shareholders is no less than 50% still remains over 47.7 %.

Stable shareholders have a long-term stake in corporations and they generally support targeted corporations in cases of hostile takeover attempts. For example even in the progression of unraveling cross-shareholdings life insurance companies as mutual companies have continued to hold corporate shares to acquire customers from employees and directors of the companies. Banks counterparty companies and employees have long-term stakes with corporations on the level of financing dealing and employment respectively. In particular the market conditions of mid-career employment are very severe in Japan. Therefore it seems legitimate to consider that employees in Japanese corporations have a huge fear of restructuring or deterioration in the employment situation as mostly happens after hostile takeovers.

Even customers who do not hold corporate shares strongly support targeted corporations in some cases of hostile takeover attempts. In the cases of the attempts targeting Seibu Holdings and Hanshin Electric Railway Co. Ltd. people living close to railroads and fans of professional baseball teams held by these two companies strongly disapproved of the attempts. Furthermore Japanese corporations have recently ramped up their efforts to increase individual stable shareholders through hospitality programs for them.

Weak Entrenchment of Notion that gCorporations Belong to Shareholdersh

Weak embeddedness of the value that kigyou wa kabunushi-no-mono (corporations belong to shareholders) is also contributing to the difficulties of hostile takeovers in Japan. The traditional value that kigyou wa stakeholder-no-mono (corporations belong to stakeholders) still remains deeply rooted in Japanese society. According to a questionnaire survey of middle managers in five countries (Japan the US the UK Germany and France) conducted from 1990 to 1992 the percentage of respondents saying that corporations put the interests of shareholders before the interests of employees exceeded 70% in the UK and the US. However the percentage of those saying that corporations put the interests of employees before the interests of shareholders was 97.1% in Japan the highest among the five countries (gWhose Company Is It: The Concept of the Corporation in Japan and the Westh by Masaru Yoshimori Long Range Planning Vol. 28 1995).

These days many corporations have started to express the importance of shareholders as owners but the idea of gbusiness enterprises for stakeholdersh is still embedded in Japanese corporations. A survey conducted in 2012 showed that Japanese corporations put the interests of shareholders above the interests of stakeholders. However the percentage of respondents answering that corporations should give the highest priority to job security rather than dividends when corporate performance was proving difficult was 89.3% (The Research Institute of Economy Trade and Industry (RIETI) A Survey of Japanese Listed Companies [Nihon Kigyou no Corporate Governance nikansuru Enquete-Chousa Houkokusho]

There have been cases where boards of directors in targeted corporations have tried to adopt strategies against hostile takeovers without their shareholders' consent in the past. When Livedoor tried to acquire Nippon Broadcasting System Inc. in 2005 the board of directors of the targeted company tried to issue massive warrants to Fuji TV without their shareholders' consent in order to foil the takeover attempt. Furthermore when Oji Paper Co. Ltd. (Oji) tried to take over Hokuetsu Paper Mills Ltd. (Hokuetsu) the first hostile TOB case between large Japanese listed corporations the board of directors in Hokuetsu did not announce the management integration plan proposed by Oji to shareholders of Hokuetsu and decided on third-party allocation of new shares to Mitsubishi Corporation without their shareholders' consent.


Although the number of MandAs has continued to rise since the economic bubble burst in Japan most of them have been friendly MandAs especially in-in MandAs. As the threat of hostile takeovers has grown Japanese corporations have rushed to introduce takeover defense measures and to implement MBOs. It is the huge presence of stable shareholders that is an especially important factor. Stable shareholders scarcely catch at hostile TOBs because they put priority on maintaining long-term relations with the targeted companies above short-term benefit. Furthermore there is a deeply-rooted culture of emphasizing long-term relations as encapsulated by the phrases komatta toki wa otagaisama (We should help each other when we have a problem) and mochitsu motaretsu (You scratch my back and I'll scratch yours) not only in business but also throughout Japanese society. This is also a major factor in the small number of hostile takeovers in Japan.

Daigaku Murata is a doctoral student at the graduate school of economics at Soka University. He is studying corporate governance.
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Publication:Japan Economic Foundation (Tokyo, Japan)
Geographic Code:9JAPA
Date:Feb 28, 2015
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