In our previous column, we explained some important regulations regarding the sales or purchase of shares of listed companies. This column provides a basic overview of transactions which are aimed to squeeze out minority shareholders in exchange for cash (“Squeeze-Out”).
On May 1, 2015, the amendment of the Companies Act of Japan to facilitate Squeeze-Outs (“Squeeze-Out Amendments”) became effective. The Squeeze-Out Amendments did not replace or invalidate the previous major method to effectuate Squeeze-Outs, the “shares subject to call” method (zenbu shutoku jokotsuki syurui kabushiki). Instead, the Squeeze-Out Amendments increased the variety of the methods that can be used to gain complete control over a Japanese target company.
Squeeze-Outs are typically used when an investment fund intends to acquire all the shares of the company (buyout), or a parent company intends to make a listed company a wholly-owned subsidiary. In particular, a buyout initiated by the company’s management (“MBO”) is a popular instance of a Squeeze-Out.
While a Squeeze-Out is a valid tool for a foreign acquirer to obtain complete control over an existing Japanese company with diverse minority shareholders, one should use sufficient care in order to comply with various procedural requirements and to prepare to defend against possible challenges by dissenting shareholders.
2. Process of a Squeeze-Out
A Squeeze-Out is typically composed of two-steps. If the target company is a listed company, the first-step is a tender offer for the shares of the company (“TOB”) and the second-step is to squeeze-out the remaining minority shareholders. If the target company is a non-listed company, please see (4) below.
(2) TOB (First-Step)
As we have explained TOBs in our previous column, this column will build upon that with additional information about regulations regarding two-step acquisitions and MBOs. Please refer to our previous column for information about TOBs.
(a) Requirement of Disclosure regarding Two-Step Acquisition
Two-step acquisition may cause coercively the shareholders to offer. In this regard, the terms and conditions of the second-step must be disclosed in the first-step under the Financial Instruments and Exchange Act of Japan (“FIEA”) and the Tokyo Stock Exchange’s Regulations. For example, the Tokyo Stock Exchange’s Regulations provide that the following items must be disclosed as a general rule:
|(b) Points to Note for MBO
MBOs may cause conflicts of interest between the management of the target company and minority shareholders thereof. In this regard, there are specific regulations for the TOB as a means of the MBO as below.
Under the FIEA, the duties for disclosure are expanded. For example, FIEA requires the disclosure of the following items:
For the tender offeror,
For the target company,
Under the Tokyo Stock Exchange’s Regulations, timely disclosure, in cases where a listed target company conducts the announcement of an opinion or representation to shareholders, shall be made in a necessary and sufficient manner. For example, the following items are provided to disclose regarding the announcement of an opinion:
(ii) MBO Guidelines
Some court decisions refer to the Guidelines on Increasing Corporate Value and Ensuring Regulatory Compliance in the Context of Management Buyouts (MBOs) (the “MBO Guidelines”) issued by the Ministry of Economy, Trade and Industry as a benchmark on the fairness of the transaction categorized as MBOs, if the management of the target company is to hold stakes in the target after the Squeeze-Out.
The MBO Guidelines state two principles. The first is “increase of corporate value” and the second is “consideration for shareholders’ interest through a fair process”. To realize the above principles, the MBO Guidelines propose practical measures which fall under the following three categories:
In addition, the MBO Guidelines indicate that a higher floor number in the TOB is desirable. In practice, the floor number is often set to two-thirds of the voting rights, which is the minimum number required for a shareholder vote in the second-step.
Conflicts of interest may arise not only in MBO cases but also in the cases where the tender offer is made by a controlling shareholder, such as the parent company of the target. The scheme of the conflicts in MBOs is basically similar to the scheme in such TOB cases. Hence, the above expanded regulations are provided to be applicable to the company’s position statement regarding the TOB by the controlling shareholders. In addition, under the Tokyo Stock Exchange’s Regulations, a listed company shall obtain an opinion from a person or entity that is not interested with controlling shareholders, that any decision on the company’s position statement regarding the tender offer by the controlling shareholders will not undermine interests of minority shareholders of the company.
|(i)||to notify the target company’s board of directors in writing of its intention to make a Demand for Squeeze-Out and provide the relevant details concerning the Demand for Squeeze-Out (in particular, the proposed closing date for the share purchase and the purchase price for the shares and share options held by the minority shareholders or holders of the options); and|
|(ii)||to request that the board of directors of the target company accept the Demand for Squeeze-Out pursuant to such terms.|
3. Potential Challenges by Minority Shareholders
Remedies available to minority shareholders who object to the Squeeze-Out Price are below:
With respect to a Demand for Squeeze-Out,
|(a)||a petition to the courts for a determination of the price;|
|(b)||an enjoinment of the closing of the Demand for Squeeze-Out;|
|(c)||an action seeking invalidation of the closing of the Demand for Squeeze-Out; and|
|(d)||an action seeking liability of the target company’s board of directors arising from a breach of a duty to protect shareholders.|
With respect to a consolidation of shares,
|(a)||an appraisal right and a petition to the courts for a determination of the price;|
|(b)||an action seeking revocation of a resolution of a shareholders’ meeting; and|
|(c)||an action seeking liability of the target company’s board of directors arising from a breach of a duty to protect shareholders.|
In this column, we focus on the petition to the courts, which seems the most practical challenge.
(2) Petition to the Court
Shareholders remaining at the second-step are entitled to a petition to the courts for a determination of the price.
With respect to a Demand for Squeeze-Out, the petition may be filed within the period beginning 20 calendar days prior to the closing date of the Demand for Squeeze-Out to the day immediately preceding the closing date. With respect to a consolidation of shares, dissenting shareholders may file a petition to the court for determination of the price through an appraisal right (to demand that the target company purchase, at a fair price, the shares held by the shareholders). The appraisal right shall be exercised within the period beginning 20 calendar days prior to the effective date of a consolidation of shares to the day immediately preceding the effective date. If no agreement on the determination of the price is reached within 30 calendar days from the effective date of a consolidation of shares, a petition to the courts may be filed within 30 calendar days after the expiration of that period.
There is no explicit criteria in the laws to determine the price for a Squeeze-Out, thus it is up to the discretion of the court. Prior court decisions, including ones made by the Supreme Court of Japan, have also been published. Although these decisions pertain to the “shares subject to call” method, the decisions are fundamentally applicable to a Demand for Squeeze-Out or a consolidation of shares.
These decisions have established that the price to be determined by the courts means a fair price on the acquisition day, which is determined by adding (a) the estimated stock price rise (which shall be attributable to minority shareholders) to (b) the objective value. With respect to (b) the objective value, many decisions are based on the average of the market price during a certain term close to the acquisition date unless there are special circumstances where market price does not reflect the objective corporate value. With respect to (a) the estimated stock price rise, the Supreme Court of Japan have decided that the court should accept a Squeeze-Out Price (including the estimated stock price rise) if the first-step’s TOB process is fair, the Squeeze-Out Price is equivalent to the TOB Price, and there are no special circumstances in which there is an unexpected change of the situation where the two-step transaction is based. If the first-step’s TOB process is not found to be fair, the courts determine the estimated stock price rise themselves. For example, regarding MBO cases, some courts determined for themselves that the estimated stock price was equivalent to the premium (20% of the objective value), referring premiums in other MBOs close to the determination.
A Squeeze-Out seemed a relatively novel legal technique in Japan and a “shares subject to call” method was commonly used for a Squeeze-Out although a “shares subject to call” was not anticipated to be used for a Squeeze-Out. In the above situation, the Squeeze-Out Amendment increased the variety for a Squeeze-Out and sophisticated the scheme. As a result, it is becoming common to use Demands for Squeeze-Outs and consolidation of shares in place of the “shares subject to call” method. It should be also noted that cooperation and coordination with the target company is indispensable in order to complete a Squeeze-Out smoothly. Although a hostile Squeeze-Out is possible in theory, extremely careful planning is required in order to complete a Squeeze-Out process without the target company’s cooperation, for example, in neutralizing a defense measure taken by the target company.
University of Southern California Gould School of Law (LL.M., 2016/Graduate Certificates in Business Law and Entertainment Law) University of California, Davis, School of Law (LL.M., 2015) Keio University (LL.B., 2000)
The International Comparative Legal Guide to: Mergers & Acquisitions 2010 (Japan Chapter), etc.
Areas of Practice:
M&A, Joint Ventures, Startups & Venture Capital, Corporate Governance, Robotics/Artificial Intelligence, Personal Data & Privacy/Big Data, etc.
Kyoto University (LL.B., 2013)