Identifier
Created
Classification
Origin
08TOKYO2029
2008-07-23 08:38:00
CONFIDENTIAL
Embassy Tokyo
Cable title:  

METI STUDY GROUP CRACKS DOWN ON TAKEOVER DEFENSES

Tags:  EINV ECON OECD JA 
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C O N F I D E N T I A L SECTION 01 OF 04 TOKYO 002029 

SIPDIS

DEPT FOR EAP/HASLACH
ALSO FOR EEB/IFD/OIA
NSC FOR TONG
DEPT PASS USTR FOR CUTLER AND BEEMAN
USDOC FOR 4410/ITA/MAC/OJ
JUSTICE FOR ANTITRUST DIVISION - CHEMTOB
TREASURY DEPT FOR IA/CARNES AND POGGI
GENEVA FOR USTR

E.O. 12958: DECL: 07/23/2013
TAGS: EINV ECON OECD JA
SUBJECT: METI STUDY GROUP CRACKS DOWN ON TAKEOVER DEFENSES

REF: A. TOKYO 1353

B. 07 TOKYO 3689

C. TOKYO 546

D. TOKYO 1550

Classified By: Charge D'Affaires James P. Zumwalt. Reason 1.4(b)(d)

C O N F I D E N T I A L SECTION 01 OF 04 TOKYO 002029

SIPDIS

DEPT FOR EAP/HASLACH
ALSO FOR EEB/IFD/OIA
NSC FOR TONG
DEPT PASS USTR FOR CUTLER AND BEEMAN
USDOC FOR 4410/ITA/MAC/OJ
JUSTICE FOR ANTITRUST DIVISION - CHEMTOB
TREASURY DEPT FOR IA/CARNES AND POGGI
GENEVA FOR USTR

E.O. 12958: DECL: 07/23/2013
TAGS: EINV ECON OECD JA
SUBJECT: METI STUDY GROUP CRACKS DOWN ON TAKEOVER DEFENSES

REF: A. TOKYO 1353

B. 07 TOKYO 3689

C. TOKYO 546

D. TOKYO 1550

Classified By: Charge D'Affaires James P. Zumwalt. Reason 1.4(b)(d)


1. (C) Summary: The Ministry of Economy, Trade and Industry
(METI) Corporate Value Study Group (CVSG) has produced a
long-awaited report on the appropriate use of corporate
takeover defenses that includes a strong statement about the
positive impact of M&A, even in cases of hostile deals, on
corporate value. The report urges companies to use defensive
measures sparingly, and not for entrenching management at the
expense of shareholder interests. Although the study group's
role is strictly advisory, METI's Director of Corporate
Systems says the GOJ will examine the report's conclusions
and consider possible legal and regulatory changes. Other
observers expect the report to have an impact on corporate
behavior and, over time, facilitate increased M&A activity in
Japan. End Summary.


2. (C) The Corporate Value Study Group report, "The Use of
Takeover Defense Measures in Light of Recent Changes in the
Investment Climate," represents a consensus of interested
parties, including both investors and corporate executives,
according to Hiroaki Niihara, Director of METI's Corporate
Systems Division, which oversees the study group's
deliberations. Investor groups, especially institutional
investors, have been increasingly vocal in demanding better
corporate governance from Japanese firms (Ref A). Japanese
corporate executives (and senior METI officials) have sought
a strong statement against defensive measures; e.g.
compensation payments to hostile bidders, such as occurred in
the July 2007 Bull-Dog Sauce, Co. case (Ref B). The new
report does both.

Defenses Must Protect Shareholder Interests
--------------


3. (SBU) The report sets out four broad principles CVSG
members believe should guide the adoption and implementation

of corporate takeover defenses. First, defenses ultimately
must protect shareholders' interests. Second, takeovers,
even if hostile, have a potentially positive impact on a
target company since they instill discipline in managers and
enhance "the common interests of shareholders and management
in increasing corporate value." Third, management must bear
in mind when considering corporate defense measures that
implementation of such steps deprives shareholders who
support the takeover bid (TOB) of the opportunity to sell
their shares to a potential acquirer. Fourth, use of
takeover defenses for the purpose of entrenching management
is never acceptable.

Directors, Not Outsiders, Must Judge Bids
--------------


4. (SBU) Building from these principles, the report sets out
practical guidelines for directors to follow when presented
with a proposed bid for their company. Key among these is
the responsibility of directors to make a clear and
unambiguous determination on the adoption and implementation
of any takeover defense, and to explain that decision to
shareholders. Many "advance warning" defenses as adopted by

TOKYO 00002029 002 OF 004


Japanese firms allow a board to appoint an "outside
committee" to analyze a TOB and advise the board on whether
to invoke takeover defenses. Institutional investors and the
American Chamber of Commerce in Japan (ACCJ) have sharply
criticized this practice, arguing these outside committees
are not truly independent and are not subject to the same
fiduciary duties to shareholders as directors. The CVSG has
now endorsed this position.


5. (SBU) The report further finds a target company's board
is obligated under their duty to care for shareholders to
issue a clear judgment about whether an offer is in the
shareholders' best interests. The board also must clearly
explain its judgment to the shareholders. If directors evade
this responsibility by turning the evaluation of a takeover
bid over to a committee of outside experts -- as several
firms have done in recent years, most recently Sapporo
Holdings (Ref C) -- this "can be considered an evasion of
responsibility" in the CVSG's view. Nevertheless, "whatever
decision the board takes, the final judgment on any takeover
bid should be made by shareholders," the report concludes.

Poison Pills Should Encourage Talks, Not Block Bids
-------------- --------------


6. (SBU) The panel also addressed "poison pill" rights
plans, which was the point of contention in the Bull-Dog
Sauce case. In that case, the company issued warrants to all
shareholders except the hostile bidder and then compensated
the bidder with a cash payment at a price per share equal to
the takeover bid. Since this cash payout equaled three
years' worth of the firm's operating profit, it forced the
company to report its first-ever operating loss.


7. (SBU) Many observers, including senior METI officials,
criticized Bull-Dog's cash payment as "greenmail", although
the Supreme Court later found the approval of the rights plan
to be within the rights of shareholders to decide and
consistent with Japan's Company Law that requires "equal
treatment" for all shareholders. The CVSG report, in effect,
repudiates that ruling, noting payment of cash, or cash
equivalent, to a hostile acquirer is not required under
Japan's Company Law. In the U.S., the report notes, the aim
of a poison pill is to press a potential acquirer to
negotiate with the target, not to block the deal. But
Japanese poison pills, which include provision for paying a
hostile acquirer to drop its bid, could reduce the incentive
for the acquirer to negotiate seriously or to sweeten its
bid, the report concludes.


METI Actively Promoting the Report
--------------


8. (C) METI Director Niihara has actively promoted the
CVSG's report since its release. He recently spoke before a
Tokyo M&A Conference sponsored by the Economist Intelligence
Unit and subsequently lectured more than 200 financial
analysts at a seminar sponsored by Nikko Citigroup. Niihara
is also scheduled to brief a Japanese business audience later
this month at a METI policy research institute.


9. (C) Niihara's message has been consistent in all these
fora. He emphasized the report "represents the wisdom of
leading experts in the field of M&A, and a cross-section of

TOKYO 00002029 003 OF 004


corporate leaders, academics and financial analysts." The
Ministry of Justice, the Financial Services Agency and Tokyo
Stock Exchange as CVSG observers also support the group's
conclusions, he added. Niihara said METI had recognized
growing "miscommunication" between investors and company
managements and so reconvened the CVSG in late 2007 to
address two questions: What are the legitimate forms for
defensive measures consistent with the role of international
capital markets in providing risk capital to Japanese
business? And, what are the integral aspects of corporate
defenses from a public policy perspective? METI had been
concerned that many of the defenses measures adopted by
listed companies are inconsistent with CVSG guidelines issued
in 2005. Based on the new report, Niihara told the Nikko
audience the GOJ will begin internal discussions on whether
changes to Japan's laws or regulations are needed.

Expert Reaction Largely Positive
--------------


10. (C) Public reaction to the CVSG report has been largely
positive. A CVSG member and senior manager of a European
investment bank told Econoff he believes the report has
cleared away the remaining confusion over the appropriate
structure and use of defensive measures that arose after the
Bull-Dog Sauce ruling. He credited Niihara with leading the
Study Group in a positive direction and working behind the
scenes in late 2007 to modify the group's membership to be
more pro-investment. The banker anticipates the report will
be well received by investors and, over time, will facilitate
M&A activity.


11. (SBU) Nikko Citigroup senior equity analyst and CVSG
member Tsutomu Fujita also praised the report. In a recent
letter to clients, Fujita said although CVSG reports have no
binding legal force, he expects "at the least, Japan's
leading companies will respect the report's contents" as it
was compiled with the assistance of representatives of
Keidanren representative and several Japanese blue-chip
firms. Fujita believes the group's findings, combined with
new strategies followed by activist funds at this year's
annual general shareholder meetings (Ref D),will lead to
gradual changes in corporate behavior, just as the CVSG's
2005 guidelines opened the door to a wave of poison pills and
other defenses.


12. (SBU) Professor Osugi of Chuo University, another CVSG
member and an expert on Japan's Company Law, told the press
not all CVSG members may be fully satisfied with the outcome,
but the report represents a broad consensus. He also praised
METI's Niihara, as the CVSG's Secretariat, for his efforts
toward a positive outcome.

ACCJ Backs Findings, Will Call for Strong Follow-up
-------------- --------------


13. (C) The Chairman of the ACCJ's Foreign Direct Investment
Committee agreed the report was generally positive and hoped
it would lead quickly to changes to the Japan's Company Law
to improve corporate governance and clarify the role of
independent directors on corporate boards. The ACCJ, he
said, plans to issue a "Viewpoint" position paper in the near
future commending the CVSG report and laying out steps the
GOJ can take to improve further Japan's M&A climate.


TOKYO 00002029 004 OF 004



14. (SBU) Yutaka Suzuki, a researcher with the respected
Daiwa Institute, writing on his economics blog, expressed
concern the CVSG report, by including a strong statement
against excessive use of defensive measures, gives the
impression hurdles for the invocation of defensive measures
have been lowered. However, overall, he praised the CVSG for
emphasizing that a fair and appropriate decision by a firm's
board of directors is a pre-requisite for introducing
defensive measures. A financial journalist, Hideki Morioka
of the Fuji-Sankei newspaper, commended the CVSG report for
recognizing management and shareholder interests can be
synonymous, and emphasizing the importance of management and
shareholders cooperating to maximize corporate value.

Comment
--------------


15. (C) The CVSG report is particularly welcome for its
unequivocal statement in support of shareholders having the
final say on any takeover bid. The report also undermines
the outdated notion that Japan has a "stakeholder" rather
than a shareholder model of capitalism. While the report's
findings may take time to affect practical changes in
corporate behavior, they will likely have an eventual,
positive impact on Japan's M&A climate if, as expected, they
lead to regulatory or legal changes. In the meantime, the
report supports domestic and foreign investors' calls for
continued improvements to Japan's system of corporate
governance.
ZUMWALT