Proposed legislative change to encourage more M&As in Japan
23 February 2011
Last week the Japanese Cabinet submitted to parliament (the Diet) a proposed change in law which will speed up, simplify, and encourage M&A transactions in Japan. The proposal aims to (a) expedite Japan’s anti-monopoly approval process, (b) simplify the "squeeze out" procedure in tender offers, (c) provide financial aid for qualifying M&A transactions, and (d) reduce the shareholder approval pre-conditions in a tender offer where shares in the offeror are issued as consideration. The Diet will now consider and vote upon the proposal and, assuming it is approved, it is expected to become law in the latter half of 2011. There is a downside to this proposed change in law, companies benefitting from the proposed amendments will have to make their business plans publically available and publish regular progress reports in respect of the transaction and their business generally, including financial statements, for up to three years. Nonetheless, it is expected that the benefits mentioned above will outweigh such disadvantages.
The Japanese Cabinet submitted a proposal to the Diet to amend Japan’s ‘Law on Special Measures for Industrial Revitalization’ (the Revitalization Law) to speed up, simplify, and therefore encourage M&A transactions in Japan.
Background: the current Revitalization Law
The Revitalization Law, which applies to all types of the companies (including public companies, private companies and foreign companies) was originally enacted in 1999 to revitalise the Japanese economy. The law allowed companies which meet certain criteria (for example, relating to productivity and financial health) to benefit from certain tax and financing reliefs in respect of an M&A transaction if its proposed business plan for the transaction (i.e. the objects, structure and benefits of the deal) receive the blessing of the relevant regulator for that business sector (e.g. the FSA in case of M&A involving financial institutions, the Ministry of Internal Affairs and Communications in case of M&A involving telecoms, etc).
New proposals: an overview of the benefits
The Cabinet's proposals will expand the range of benefits available to eligible companies under the Revitalization Law:
Mergers to benefit from expedited anti-monopoly vetting
Where a merger plan requires anti-monopoly approval from the Japan Fair Trade Commission (JFTC), the JFTC can no longer rule in isolation without consultation. Instead the JFTC must now consult with the relevant regulator for that business sector (e.g. the FSA in case of financial institutions, etc). Until now, this type of consultation by the JFTC was voluntary and did not always happen. The wider and more accurate market information possessed by relevant business regulators is expected to significantly speed up the JFTC approval process. We expect this change in law will benefit overseas parties acquiring Japanese companies, as well as solely domestic deals.
Simplified squeeze out process for tender offers
Where a tender offeror succeeds in acquiring 90% or more of a target's shares, a shareholders' meeting of the target must be held to approve the "squeeze out" process (allowing the offeror to compulsory acquire the remaining shares in the target). The new proposal will remove the need for a shareholders' meeting to approve the "squeeze out". The effect will be to reduce the time required to implement a "squeeze out" process by approximately three months. In addition to purely domestic transactions, this proposal should benefit overseas parties acquiring Japanese companies.
Simplified process to approve tender offers involving shares as consideration
Where a Japanese tender offeror issues shares in itself to target shareholders as consideration, the offeror no longer needs to obtain formal approval (potentially at shareholder level) for the price per share to be issued, instead the new proposal means that solely the number of shares to be issued needs to be approved. This simplifies matters, particularly where the offeror’s share price is fluctuating in the market.
Under the proposals, the Japan Finance Corporation (JFC) has access to a cash pool to provide low interest loans (up to ¥100 billion for 2011, thereafter to be decided) to Japanese companies which wish to effect M&A plans that are in accordance with the government's loan and investment program.
New proposals: an overview of the downside
In exchange for these proposed liberalizations, companies which benefit from the amendments will be required to make their business plans publicly available and to publish regular progress reports in respect of the M&A transaction and their business generally, including financial statements, for up to three years.
It is expected that the benefits outlined above outweigh any perceived disadvantages. The Diet will now consider and vote upon the proposals and, assuming approval, are expected to become law in the latter half of 2011. If implemented into law, the proposals are expected to speed up, simplify, and encourage M&A transactions in Japan.