How do Overseas Companies Acquire Japanese Companies ? Here are the summary as below.
Lowering Acquisition Barriers: It has been easier than ever before that overseas companies acquire Japanese companies.
Legal and Regulatory Developments in M&A: Japanese government has introduced over the past five years various measures, guidelines and legal reforms in terms of corporate governance, stewardship, communication with investors and M&A promotion for listed companies. These developments create a favorable environment and encourage overseas companies to acquire Japanese firms.
Government Support: The Japanese government has shown a welcoming attitude toward foreign investments, including acquisitions of Japanese companies, as long as national security isn't compromised. In fact, the influx of foreign capital, increased influence of proxy advisory firms, the rise of activists, the growing presence of private equity funds and generational shifts in corporate management are seen as outcomes of legal reforms promoted by the government. These factors have further lowered the barriers to acquire Japanese companies by politically favorable overseas entities.
In-Out Deals on the Rise: Recent proposals, like Couche-Tard’s friendly acquisition approach for Seven & i Holdings, suggest that an increase in In-Out M&A deals involves publicly friendly proposal processes. Listed companies where outside independent directors make up the majority have shifted their focus to fairness and transparency in M&A processes in line with the new guidelines. As these practices become more widely known, I believe that the number of acquisition proposals by overseas companies for Japanese firms is expected to increase.
How to Acquire Japanese Companies: Several approaches can be taken, but the most successful method are as follows:
1) To identify companies that are likely to fairly consider an acquisition proposal from a foreign entity (the details described as below).
2) To present a friendly public proposal.
3) To gain support or agreement from a special committee set up by the board of directors in a target company, and
4) To proceed with a friendly tender offer under the endorsement of the target company's board of directors.
However, hybrid acquisitions involving both stock and cash, which are common in the US and Europe, are not tax-advantageous in Japan. As such, a 100% cash acquisition is inevitable for now. The relevant legal reforms in this area will be introduced in the future in order to meet US's and European standard.
High Barriers for Private Companies: The above opportunity only applies to listed companies. Japanese private companies, not subject to government's M&A policies, remain largely focused on domestic M&A. Unless there are specific historical relationship of trust, the likelihood of buyouting Japanese private companies by foreign companies remains very low.
Significant Drop in Acquisition Barriers
Since 2018, M&A activity has increased significantly, primarily due to the rise in In-In deals, driven by industry consolidation and business succession among unlisted companies.
Additionally, the mindset of management on M&A has been changed into a more familiar part of corporate strategy. The introduction of legal regulations and guidelines related to M&A has also contributed to creating a more favorable environment for such transactions.
A timeline summarizing these developments is as follows:
2000s: Regulations regarding finance and stock exchanges, including M&A, were relaxed and the disclosure system was improved, leading to a rise in M&A activity along with the economic recovery. However, it brought strong public resistance to hostile takeovers and private equity funds which led to challenges in certain M&A cases.
2010s: Although the number of M&A deals decreased due to the Credit Crisis started in 2007, In-Out deals gradually increased, driven by the rise of the yen. Since 2013, M&A activity has continued to increase in line with economic recovery.
2020s: From the mid-2010s going forward, as Japan has accumulated significant M&A knowledge and experience, legal regulations, guidelines, and corporate governance have been strengthened. The perception of hostile takeovers and PE funds has shifted and executives are now expected to take M&A more seriously. More focussing on investment efficiency, such as ROE (return on equity) or ROIC, companies can no longer ignore dialogue with investors including activists.
Given this historical trend and the new guidelines, even unsolicited proposals must be taken seriously by the target company's board if they are considered sincere. Listed companies’ management is now required to focus on maximizing shareholder value and the risk of acquisition for listed companies has risen sharply. It is no longer possible for top executives to simply dismiss acquisition proposals without submitting them to the board.
2. Development of M&A Regulations in Japan
In particular, the legal regulations and practical guidelines on M&A introduced in the past five years have had a significant impact on Japan's M&A landscape. It has been increasingly impossible for the management of listed companies to ignore acquisition proposals or engage in self-protecting strategies that don't contribute to enhancing enterprise value. This shift brings Japan closer to the US.
As a result, management has clearly changed its awareness on financial strategy, M&A, and enterprise value. This has led to an increase in shareholder proposals from investors and unsolicited acquisitions between strategic buyers.
Here is an overview of recent important M&A regulations. While the basic M&A regulations remain unchanged, the introduction of government-issued guidelines (which are non-binding and apply only to listed companies) and rules set by stock exchanges (which also apply only to listed companies) are key developments.
Takeover Bid: The rules remain unchanged in that a Takeover Bid is required if >1/3 of shares in a listed company is acquired. However, detailed rules have been stipulated, requiring a takeover bid under certain conditions even in case of acquisitions of 5% or more. Therefore, assigning financial advisors and/or lawyers with deep knowledge of the Japanese market is essential for overseas acquirers. (here）
Foreign Exchange and Foreign Trade Act (FEFTA): If a listed company operates in a core industry defined by the government (e.g., aircraft, nuclear facilities, cybersecurity, electricity, gas, telecommunications, water supply, railways, petroleum, broadcasting, biological chemicals, agriculture, etc.), prior notification and approval are required. For non-core industries, only post-acquisition reporting is necessary if an overseas buyer acquires 10% or more of shares. Prior notification and approval are generally required to acquire unlisted companies regardless of whether they operate in core industries.
Fair M&A Guidelines (2019): The "Fair M&A Guidelines", published by METI in June 2019, not only apply to MBOs and M&A involving controlling shareholders but led to the introduction of the Guidelines for Corporate Takeovers in 2023 which explain how management should deal with buyout proposals. Although not legally binding, the guidelines have effectively been rules for how listed companies should consider M&A proposals by management or controlling shareholders. They emphasize fairness and transparency in decision-making processes that special committees should review proposals, provide opinions to the board, seek expert advice and involve independent directors.
Stewardship Code (2020): Introduced in 2015 together with the original Corporate Governance Code, it enhanced the rules concerning the exercise of voting rights by institutional investors, dialogue activities with investee companies, and explanations and disclosure related to the evaluation and utilization of such activities. It also emphasized the importance of proxy advisory firms and purposeful dialogue regarding sustainability issues, including ESG factors. In the past, asset management firms under financial institutions which have business
relationship with listed companies did not express opposition to agenda of thier general meetings of shareholders. However, in order to clarify accountability and maximize returns for investors, rules for investors were established.
Business Portfolio Restructuring Guidelines（2020）: Published by METI in July 2020, the guidelines encourage listed companies to focus on managing investment returns, such as ROE and ROIC. Japanese companies have historically been proactive in making acquisitions, but reluctant to divest businesses, because of concerns on treatment of employees after the divestment. The guidelines pointed out that low investment returns have resulted in the undervaluation of Japanese companies under their conglomerate management. Consequently, the guidelines recommend that companies periodically review whether they are the best owner of low-profitability businesses. If not, they should actively pursue divestitures. Given these guidelines, Hitachi has advanced the sale of its listed subsidiaries, followed by more companies which now consider business portfolio management as a key managerial priority.
Amendment of Corporate Govenernce Code(2021)：Originally introduced in 2015, the amendment established the following rules to enhance the functionality of boards of directors. Companies listed on the Prime Market in TSE must:
(1) select at least one-third of directors as independent outside directors,
(2) establish nomination and compensation committees where a majority of committee members are composed of independent outside directors,
(3) disclose relationship between the skills such as knowledge, experience and abilities required in line with the company’s business strategy and those possessed by each director, and
(4) appoint independent outside directors with executive experience to manage other companies.
Guidelines for Corporate Takeovers（2023）：Published by METI in August 2023, the guidelines recommend that bona fide acquisition proposals require the board of members in a target company to make sincere consideration. Based on the M&A guidelines, they aimed to ensure measures of fairness, preventing directors from acting in self-preservation.
The introduction of the government-led laws and guidelines is expected to increase the risk of hostile takeover proposals for listed companies. This trend, starting with epoch-making in-out transactions like Seven & i, suggests a likely increase in similar in-out deals going forward.
3. Is Japanese government also supportive?
As mentioned in the section on "2. Development of M&A Legal Regulations" above, Japanese government has taken the initiative in advancing the establishment of M&A-related laws and guidelines. Given the government's positive stance towards investments by foreign individuals, companies and investors into the Japanese market, as exemplified by inbound M&A, the government is unlikely to express concerns about foreign companies acquiring Japanese companies unless they are categolized as core industries.
In particular, the government may expect that aggressive foreign investors' suggestions to Japanese companies would be beneficial to strengthen the global competitiveness of Japanese firms and to enhance their enterprise value.
Hence, it is even conceivable that Japanese government might welcome large foreign companies which show interest in Japanese firms without core industries and encourage such acquisitions. Through foreign companies, they could leverage thier products, services and technologies to bolster their strength as well as the overall Japanese economy.
It should be noted that "foreign companies" referred to here are Japan’s friendly nations and that countries with hostile relations are excluded. Therefore, it is a prerequisite that any foreign company considering the acquisition of a Japanese company maintains good political relations between its home country and Japan.
4. Could the Couche-Tard/Seven & i case trigger an increase in In-Out transactions?
Currently, the public proposal by Couche-Tard for Seven & i, in light of points 2 and 3 above, could actually be seen as a long-awaited large-scale In-Out M&A for the Japanese government, with the potential to ripple through other sectors. There might even be an underlying intent to instill a sense of urgency in the management of major Japanese companies, encouraging them to steer away from stable, conservative management and instead pursue aggressive overseas expansion.
In the remaining years of the 2020s, Japanese companies with a focus on stability rather than growth, without an awareness of investment returns, could be potential targets for foreign acquisitive companies. This could potentially lead to an increase in In-Out transactions. The Japanese government may even anticipate such deals, leveraging the strength of foreign companies to bring a renewal in various industries, leading to the promotion of new industries in Japan and a virtuous cycle of economic growth.
In any case, the introduction of the Guidelines for Corporate Takeovers last year seems likely to be a trigger for large-scale In-Out acquisitions of Japanese companies by foreign buyers.
5. How to buyout Japanese firms
While various patterns can be considered, the most effective way for a successful acquisition of Japanese listed firms is to first identify companies likely to fairly consider proposals by foreign firms. The key points to consider are as follows:
Shareholder Structure: Is an ownership structure dispersed? Is the percentage of foreign investors high? Are there any activists investing in a target?
Presence of Outside Directors: Does the board consist of a majority of outside directors? Are there any foreign directors? Are there any outside directors with expertise in M&A?
Possibility of Special Committee: If a listed company has a majority of outside directors, it is highly likely that a special committee will be formed to consider sincere proposals by a buyer. Once a special committee is established, the acquisition process will be conducted in line with the Guidelines for Corporate Takeovers, ensuring a fair and transparent M&A review process which increases the likelihood of a successful acquisition if a rational and bona fide offer is submitted with a high premium valuation.
Approval from the Special Committee: If a special committee, consulted by the board of directors, endorses the proposal, it is generally followed by approval from the board, leading to the launch of a friendly takeover bid afterward. As the process involves a fair and transparent M&A process, a market check (search for other potential buyers) will also take place, necessitating the offer of a competitive price with a premium. Multiple rounds of price negotiations with the special committee are to be expected.
Interloper Risk: a fair and transparent acquisition process also heightens potential risk of interlopers, meaning that there is a possibility of receiving unsolicited acquisition proposals during the takeover bid process. This requires a certain level of preparedness during the period, and in some cases, rising the offer price may be necessary.
100% Cash Acquisition: In the US and Europe, a hybrid takeover bid using stock consideration or a mix of stock and cash is common. However, since tax incentive systems in Japan are not yet established for such methods, a takeover bid is based on 100% cash consideration, which could be a significant hurdle. Hopefully, legal reforms in this area will be introduced in the future.
High Barriers to Acquire Private Companies
The points outlined in sections 1-5 apply exclusively to listed companies in Japan. For private companies, not subject to government influence, domestic M&A transactions between Japanese firms will remain the norm. Other than specific circumstances, it is unlikely that foreign companies could acquire Japanese priveate firms. In principle, the acquisition of private companies might occur if there is a long-standing business relationship, a deep understanding of Japanese business practices and strong trust with the target company.
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