FDI and Corporate Governance in Japan
Michael Ryland
Partner
21 July 2008
204733349_2
Geread Dooley
Lawyer
Topics
• FDI regulation in Japan
• Foreign Exchange and Foreign Trade Law
• FDI case study
• AREITs in Japan
• Takeovers law in Japan
• Takeover Defence Guidelines - Regulatory
response
• Bulldog Sauce case – Supreme Court's stance
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FDI AND CORPORATE GOVERNANCE IN JAPAN
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FDI regulation in Japan
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A few FDI facts on Japan
• US$28.8billion net
inbound FDI in 2007
Inbound FDI as % of GDP
100
90
80
70
60
50
40
30
20
10
0
• Japanese Government
seeking to double inbound
FDI to 5% of GDP by 2010
m
er
S
K
G
U
U
y
an
n
pa
Ja
Countries
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21 JULY 2008
• US$50 billion net
outbound FDI in 2006
Foreign Exchange and Foreign Trade Law (FEL)
•
「外国為替及び外国貿易法」（「外為法」）
"Gaikoku - Kawase - Oyobi - Gaikoku - Boeki - Ho" ("Gaitame - Ho")
•
Deals with both "Outward Direct Investments" and
"Inward Direct Investment"
•
"Inward Direct Investment" covers almost all
investment activities of foreign company in Japan
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1998 amendments to FEL
1. Change to approval process: from "Prior
Notification" to "Post Facto Report"
2. Change of name: from "Foreign Exchange
and Foreign Trade Control Law" to "Foreign
Exchange and Foreign Trade Law"
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FDI AND CORPORATE GOVERNANCE IN JAPAN
21 JULY 2008
Three types of approval/ notification
regulation:
Prior
Approval
Prior
Notification
Post Facto
Report
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21 JULY 2008
Example - acquiring shares in a Japanese
company
• Target: Japanese company established in
Japan ("Kabushiki Kaisha")
• Foreign investor: foreign company
• "Post Facto Report" or "Prior Notification"?
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Exemptions to both Prior Notification and
Post Facto Report
1. The foreign investor acquires shares from
another foreign investor; or
2. The number of shares held by a foreign
investor (and certain affiliated entities) as the
result of the acquisition is less than 10% of
total shares ("Percentage Test")
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Questions to be examined:
Q1. "Percentage Test":
• less than 10% → no filing required
• 10% or more → go to Q2
Q2. "Industry Test" and "Country Test":
• If a Non-Sensitive Industry and Eligible Country
→ "Post Facto Report"
• If A) Sensitive Industry and/ or B) Ineligible
Country → "Prior Notification"
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Other requirements:
• "Law Concerning Prohibition of Monopoly and
Preservation of Fair Trade"「独占禁止法」
（"Dokusen - Kinshi - Ho"）or「独禁法」
（"Dokkin - Ho"）
• "Securities and Exchange Law" 「証券取引法」
（"Shouken - Torihiki - Ho"）or「証取法」
（"Shoutori - Ho"）
• Note - "Financial Instruments and Exchange Law"
amended the "Securities and Exchange Law" in 2006
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A-REITS in Japan
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Investing in Japanese real estate
Currently 4 ASX listed property funds with
100% Japanese real estate assets
•
•
•
•
Babcock & Brown Japan Property Trust
Challenger Kenedix Japan Trust
Galileo Japan Trust
Rubicon Japan Trust
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Investment model
Investors
(Retail / Wholesale)
Responsible Entity
Lender
"Trust"
Custodian
Asset
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Investment issues
• Acquire title to land?
• Acquire title to trust beneficiary certificate?
• Investment vehicles: TK, TMK
• Acquire equity?
• Board positions? NB residency
• Management arrangements
• FIEL licensing implications
• Borrowing (banks, bank accounts, security)
• Entering into contracts
• Making distributions
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Takeovers in Japan
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An overview - "Streamlining the Market for
Corporate Control: A Takeovers Panel for Japan?"
• Japanese takeover activity on the rise
• Catalyst: Takafumi Horie and the Livedoor case
• Unintended consequences
• Corporate Japan – "poison pill" defences
• Japanese government – "Guidelines Regarding
Takeover Defences for the Purpose of
Protection and Enhancement of Corporate
Value and Shareholder's Common Interests"
('Takeover Defence Guidelines') (May 2005)
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An overview - "Streamlining the Market for
Corporate Control: A Takeovers Panel for Japan?"
• "Takeovers Panel" in Australia
• Primary forum for resolving takeover disputes
• Aims to bring speed, specialist expertise and
commercial pragmatism to the dispute
resolution process
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"Japanese
corporate
environment is ripe
for an innovation
such as a Takeovers
Panel based on the
Australian model."
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Japanese takeover activity on the rise
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Takeover Defence Guidelines: the government’s
response (1)
• Recognises pros and cons of M&A
• Endorses US-style defensive measures to
avoid market damaging M&A activity
• Implicit approval of Delaware takeover
jurisprudence, home of the poison pill defence
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Takeover Defence Guidelines: the Government’s
Response (2)
• Three main principles:
1.Enhance ‘corporate value’ and common
interests of all shareholders
2.Disclosure to shareholders
3.Conform to Japanese law
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Reliance on missing infrastructure? (1)
• No guidance on timing of poison pills
• Who monitors corporate management?
• The Policemen:
• Shareholders
• Independent directors
• Courts
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Reliance on missing infrastructure? (2)
• Shareholders
• New presence - foreign share ownership from
6.3% in 1993 to 23.7% in 2005
• Shareholder activism on the rise
• But…
• Financial institutions and business corporations
still hold 54.8% of all shares on the TSE
• Since 2005 - 353 Japanese companies had
sought approval for defensive measures at
shareholders meetings
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Reliance on missing infrastructure? (3)
• Independent Directors
• Still in its infancy – 2002 Commercial Code
• Limited impact?...
• Definition of 'independent' director
• Optional - between 2002 and 2004 only 3%
of eligible firms, adopted the amendment
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Reliance on missing infrastructure? (4)
• Courts
• Will need to build a body of law from the ground
up
• Bulldog Sauce case….
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Steel Partners v. Bulldog Sauce Co. Ltd
(Bulldog Sauce Case)
• State of play before Bulldog Sauce case –
very limited number of cases had considered
defensive measures in takeover bids
• Rationale of the main decisions management’s authority to manage the
company comes from the shareholders
through their appointment
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Bulldog Sauce Case - Facts
• 18 May 2007 - Steel launches takeover bid on
– offered 1,584 yen/ share to acquire100 per
cent of Bulldog's shares.
• Bulldog and Steel exchange questions and
comments in writing.
• Bulldog implement's a defensive measure –
allocated stock acquisition rights with
discriminatory terms against Steel.
• Bulldog also seeks endorsement by
shareholders at AGM on 24 June 2007 83.4% of total shareholders approve.
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Bulldog Sauce Case - Facts
• Steel sought preliminary injunctive relief
• Three Japanese courts reviewed and decided
the case from the viewpoints of whether such
allocation:
(i) conflicts with the principle of equal
treatment of shareholders (kabunushi byodo
no gensoku); and
(ii) constitutes a materially unfair issuance
(ichijirushiku fukosei na hakko).
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Supreme Court Decision
• All three courts allowed the takeover defence but on quite different grounds.
• Supreme Court paid high regard to the
resolution of the shareholders’ meeting in
determining the necessity of the defensive
measure.
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