M&A Guide 2025: Japan

In 1989, the renowned Texan oil and gas tycoon and takeover specialist T Boone Pickens shocked the Japanese market by becoming the largest shareholder in Koito Manufacturing. The case sensationally highlighted challenges that unsolicited takeovers of Japanese listed companies potentially faced at the time. The Japanese M&A market – and, in particular, listed company takeovers – is markedly different today, thanks, in part, to a series for reforms that Japan’s corporate regulators have implemented over the past couple of decades.

Thanks to the latest of these steps, M&A practice in Japan, particularly in relation to unsolicited takeovers, seems destined to enter a new phase. The regulators driving these reforms are:

• The Ministry of Economy, Trade and Industry (METI);

• The Financial Services Agency (FSA); and

• The Tokyo Stock Exchange (TSE).

In 2005, METI published a set of guidelines to put a brake on excessive adoption of takeover defence plans, and later, in 2007, published guidelines focusing on conflicts of interest in management buyouts. In 2019, METI published guidelines addressing broader conflicts issues, and, most recently, in 2023, published guidelines on corporate takeovers not sanctioned by target company management.

In addition, the FSA and TSE published a corporate governance code in 2015 to promote, among other reforms, the appointment of independent directors to listed company boards. The code has undergone several revisions since initial publication. They also published a stewardship code for listed company management and a set of principles for the exercise of listed company voting rights by institutional investors.

Amid these reforms, the recently published guidelines regarding unsolicited corporate takeovers have attracted considerable attention.

To date, very few hostile takeovers have succeeded in Japan, and there have been no successful examples of any strategic takeover of a listed company initiated on an unsolicited basis and without the target company management’s endorsement, even at the end of the process.

Faced with a hostile takeover, the target company management has typically responded by rejecting the proposal. However, METI’s new guidelines now expressly require management to take into account the interests of ordinary shareholders in considering such proposals and this guidance is expected to have a significant impact on the way management responds to takeover proposals in future.

In 2021 (before the new METI guidelines), Shinsei Bank’s management adopted a takeover defence plan in response to a takeover proposal from SBI Holdings. This was despite the fact that the bank still had a significant amount of public funding outstanding, while most other major commercial banks had completed repayment of the public funds they had received.

Consequently, the government took a different view (the Deposit Insurance Corporation of Japan and another government-related shareholder had converted the preferred shares they acquired in Shinsei Bank as a result of the injection of public funds into ordinary shares) and Shinsei Bank’s management was unable to pursue a response contrary to the government’s view. In the end, the management withdrew its opposition to SBI’s tender offer, and the tender offer succeeded. However, in the absence of major shareholders having such influence, management has, to date, typically adopted a position of opposition to unsolicited takeovers.

In effect, METI’s corporate takeover guidelines now make unsolicited takeovers a more realistic option in corporate M&A. In addition, the gradual unwinding of cross-shareholdings promoted by the Corporate Governance Code and other guidelines have enhanced the chances of hostile takeovers succeeding, and this appears to have prompted a number of corporations to consider pursuing takeovers, even on an unsolicited basis.

Against this backdrop, the following two recent takeover proposals have attracted a lot of media attention. In each case, the proposal proceeded without target company management endorsement.

The feasibility of Alimentation Couche-Tard’s proposal is unclear from publicly available information. However, it demonstrates that the possibility of a foreign acquirer taking over a very large cap Japanese company with a substantial business has become a reality. In response, the founding family expressed its intention to submit a competing bid but subsequently gave up the idea after it failed to obtain funding for its takeover bid (TOB).

Both parties are large listed companies and Makino Milling’s disclosure indicates that the company regards Nidec’s bid as hostile. At the end of 2024, Nidec announced its intention to launch a tender offer starting in April, and is now responding to the target’s request for disclosure of further information.

The terms of METI’s guidelines themselves are rational and make clear that if an unsolicited proposal is bona fide, the target company should give due consideration to the proposal and determine whether it is in the interests of ordinary shareholders. The guidelines also require the acquiring party to disclose a reasonable level of information in connection with the terms of the bid in view of the existence of the various stakeholders of the target company.

While they are intended to articulate best practices, the METI guidelines do not have the force of law. However, they were prepared based on the deliberations of a study group made up of M&A practitioners in addition to regulators, academics, and leading financial institutions, and practitioners often refer to the guidelines when advising takeover participants. As such, it appears that the guidelines do have considerable authority.

The new METI guidelines, and takeovers that have followed their publication, give rise to several important legal considerations.

There have been a certain number of TOBs commenced or announced on an unsolicited basis, including ones before publication of the METI guidelines. Some just announced an intention to pursue a takeover to be initiated subject to certain proposed conditions being met. OK Store’s proposed takeover of Kansai Super Market is a case in point, as is, more recently, Bain Capital’s proposed takeover of Fuji Soft.

Commencing a TOB normally entails using best efforts to procure the prior agreement of the target company management and its major shareholders. If the acquirer is not able to procure such an agreement, there is a substantial probability of failure, but once commenced, under Japanese securities laws, a TOB offeror can abandon the TOB for only quite limited reasons. This is generally regarded as the reason why, in some instances, acquirers just make an announcement rather than immediately commence a takeover.

There is a view that making such an announcement is market manipulation prohibited under Japanese securities laws, and there are also FSA guidelines to some extent supporting that view. However, there is no precedent of the authorities prosecuting such announcements and it is expected that the practice will continue in future.

Another consideration is that takeovers involving consolidation of the market shares of companies carrying on the same or a similar business may be subject to market concentration and merger restrictions under competition law. In the case of domestic markets, such consolidation is subject to the Anti-Monopoly Act and acquirers will need to consider the level of market concentration and whether the Japan Fair Trade Commission (JFTC) will approve the takeover.

The JFTC can approve a takeover subject to conditions such as the relevant party divesting a part of the relevant business, but whether such a takeover would achieve the purpose of the acquisition also needs to be considered. In the Makino Milling case, Nidec has issued press releases to the effect that the deal has received Japanese and US antitrust clearance. In the Seven & i Holdings case, US market concentration will be an issue.

In addition, if the acquirer is a foreign company, foreign investment approval is required if the target is a listed company that carries on a material business from a national security perspective. Recent amendments to foreign investment regulations have lowered the shareholding ratio threshold requiring approval to 1% and it is expected that the relative ease or difficulty in obtaining approval in a particular case will vary depending on the type of business that the target company carries on. Foreign acquirers will need to consider this point before proceeding with an acquisition.

Prior to publication of the new METI guidelines, target companies that had adopted takeover defence plans would require acquirers to provide quite detailed information regarding the bid. However, the guidelines state that the level of information to be provided at the request of the target company should, in principle, be based on the information that is to be contained in the acquirer’s tender offer statement (to be filed with regulators) and it is expected that this will become the standard in practice. That said, the volume of information sought in the Makino Milling case in respect of the business justification for the takeover appears to exceed this level of information.

If the target company has conflicts of interest, the usual response is to establish a special committee comprising outside non-executive directors and have the bid considered by the committee. That said, unsolicited takeovers normally do not involve conflicts of interest and, as such, can be considered by the board of directors.

However, the METI guidelines suggest that a special committee arrangement be used when the TOB involves a cash-out, management intends to introduce a defence plan, or the TOB is a “high stakes” case. This may relate to the practice in more than a few Japanese listed companies where the CEO rather than the board nominates the next CEO and a majority of the board are executive directors (who report to the CEO). In such arrangements, the board of directors is relatively close to the consideration and business judgement of the executive directors, including the CEO, and in that sense, can be said to lack sufficient independence to objectively consider an unsolicited takeover proposal.

Another consideration is the exercise of voting rights controlled by undisclosed beneficial owners. The Ministry of Justice (MoJ) is now considering amendments to the Companies Act in relation to this issue. The purpose of the mooted amendments is to address the fact that funds, institutional investors, and other shareholders recorded in the company’s shareholder register are often not the parties that make decisions in relation to the exercise of their voting rights.

Following a review by an informal committee, certain options to address the issue have recently been formally presented to an MoJ committee for the purposes of presenting a basic plan based on which of the amendments will be drafted. In essence, the proposed amendments would require shareholders to disclose to the target company information identifying any parties that are able to direct the exercise of voting rights in respect of shares held in their names, and this would apply to upstream parties, too. As a sanction, suspension of the exercise of the voting rights of such parties is also under consideration.

However, it is unclear at this stage whether any legislation along these lines will be passed, and, in particular, the level of sanction that might apply to violation of the disclosure requirement. In any event, even if passed, the amendments are not expected to come into effect until 2026 at the earliest.

That said, in an unsolicited takeover, the acquirer needs to disclose a sufficient level of information to ordinary shareholders to get them to accept the tender offer, and in this context, it is expected that information regarding the actual identity of the shareholder will be made available as a matter of practice. If it is not made available, the target company management may respond by not endorsing the tender offer. This reform is likely to be more meaningful in the context of shareholder meetings held during periods of market volatility, such as might occur as a result of an attempt to corner the market.

Legislative amendments in relation to TOBs and substantial shareholding reports have recently been promulgated, and are pending subordinate legislation coming into effect.

The amendments in relation to TOBs expand the circumstances in which the obligation to commence a TOB arises and the effect of these amendments will be to accelerate the timing of unsolicited takeover bids. The amendment of the substantial shareholding reporting regime is aimed at ensuring greater clarity regarding coordinated shareholdings. The amendments will likely become effective in 2026.

While there is no statutory restriction, there is a court precedent that appears to have allowed a ‘majority of minority’ approval process (where the votes of major shareholders supporting the takeover are excluded from the shareholder vote on the takeover). However, as there have not been any other cases following this decision to date, it is unclear to what extent these rulings will be followed in future cases.

The regulatory environment for pursuing unsolicited takeovers has arguably improved. Target company management may continue to expressly or impliedly oppose such takeovers, but, ultimately, what shareholders think is the important point.

Recently, in a preliminary agreement that Honda and Nissan entered into in relation to a potential alliance between them, the parties agreed that if either of them entered into a business consolidation with a third party during the term of their preliminary agreement, the party in breach would pay a penalty of JPY100 billion to the other party. Under the Companies Act, substantial financial commitments are subject to board approval and do not require shareholder approval. This should also apply to the Honda–Nissan discussion, but it is an open question whether it is appropriate for a company to accept a potential liability of such a magnitude prior to entering a definitive agreement with a third party.

On a related point, to prevent such an agreement, in theory the shareholders could pursue a derivative suit to establish the directors’ liability (to the company) based on a breach of the “duty of care of a good manager” in relation to their business judgement, but as plaintiff shareholders are not compensated in such a suit, there is no economic incentive for them to pursue shareholder derivative suits.

It has since been disclosed that the Honda–Nissan alliance discussions have ceased and the preliminary agreement has been terminated.

Japan has no laws requiring disclosure of a preliminary or, if entered into, a definitive agreement along these lines.

Lastly, given the legal considerations and uncertainties discussed above alone, it remains to be seen to what extent there will be more unsolicited takeovers in future. That said, it seems clear that acquirers will need to determine whether to proceed with a tender offer on an unsolicited basis based on more limited information. In addition, if the takeover involves the shares of a listed company, ordinary shareholder acceptance may not be forthcoming unless the offer includes a significant premium to its market price. In the Makino Milling case, Nidec’s offer price was at a 42% premium to the previous day’s closing price.

If the target company is a listed company, information that reduces the price must be disclosed under securities laws and under TSE rules. However, in reality, that is not always the case, and factors that exert downward pressure on the stock price may be discovered post acquisition. In addition, if the target is a large listed company, it usually has a large number of stakeholders, including those with contractual relationships (business partners, financial institutions, etc.) with whom the company may have agreements that include the counterparties’ termination rights in the event of a change in control. A takeover may trigger such termination rights, but an acquirer cannot ascertain them or assess associated risks prior to the acquisition.

Furthermore, Japanese labour laws strictly regulate the termination of employees and any material reduction in employee salaries and benefits about which the acquirer may be unable to obtain information prior to a TBO commencement. In other words, post-acquisition rationalisation of labour costs is not legally easy to accomplish and even if implemented, might negatively affect employee motivation. In this regard, it is also worth noting that takeover defences involving director incentives such as ‘golden parachutes’ are not used in Japan. This is probably due to the fact that director compensation is subject to shareholder approval.

Overall, hostile takeovers inevitably entail valuation and post-merger integration risks.