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Analysis-A court battle raises the question


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© Reuters. The Tokyo Kikai Seisakusho Ltd. miniature Model Color Top Magazine rotary Press is on display at Tokyo’s headquarters, Tokyo Japan. October 21, 2021. REUTERS/Issei Kato

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Makiko Yamazaki

TOKYO, Reuters – Japan’s leading newspaper printer could be subject to hostile takeover bids. A court decision will determine whether or not the company can proceed with a poisonous pill against an unsolicited shareholder.

It is a question of whether Tokyo Kikai Seisakusho Ltd (105 years old) will be allowed not to count votes of Asia Development Capital, an investment group that has built up the majority of its 40% stake over a few weeks. When shareholders vote on issuing stock that could dilute ADC’s ownership, this is where the issuer is at dispute.

Holding more than 33% Japanese shares gives stakeholder the ability to vote on important board decisions. Sometimes, it can even give them de facto control.

ADC requested an injunction. Tokyo District Court’s ruling, which was the first court to examine an attempt by an investor to be excluded from a shareholder vote regarding a poison pill, is expected to come within the next week. Tokyo Kikai’s victory could make it easier for Japanese companies to take poison pills.

Tokyo Kikai has stated that ADC reduces its corporate value and will vote for the poison pill plan at an extraordinary general assembly on Friday.

This battle has highlighted both an increase in hostile takeovers Japan in the last few years. The practice, once thought to be the province of greedy corporate raiders, is now losing its stigma. Experts also see in Japan inadequate takeover laws that make it difficult for small companies to defend themselves.

This also happens at a moment when investors will be watching to see how Fumio Kirishida’s drive to reverse the pro-market policies implemented by Shinzo Abe as Japan’s former prime minister has an impact on corporate governance.

According to experts in corporate governance, it can be difficult for judges and juries to decide which direction they will go.

ADC’s contention that Tokyo Kikai’s ruling would not be in ADC’s favour is strong. The principle of shareholder equality has been enshrined into Japanese corporate law.

Takumi Watanabe (executive officer, QuestHub proxy advisory firm) stated that if a target company is able to select the number of people allowed to vote on the poison pill it will make all sorts of excuses in order to compile a list with eligible shareholders who stand the greatest chance of passing the pills.

QuestHub stated that it was not involved with the transaction.

However, governance experts believe that the court could decide ADC is an “abusive purchaser” and that it can threaten minority shareholder rights. ADC built its stake quickly without presenting the company nor other shareholders with any new management plans.

It would not happen overseas.

More than 500 Japanese corporations had an indefinite poison pill nearly a decade before. This was typically included in their articles of incorporation. However, the practice was heavily criticised as a way to entrench bad management. It fell out favor when Abe introduced corporate governance reforms that required institutional investors to reveal how they vote on items in shareholder meetings.

(GRAPHIC: Number of firms with anti-takeover measures in Japan – https://graphics.reuters.com/JAPAN-MA/gdpzywbelvw/chart.png)

In Japan, an emergency poison pill is a poison that attacks a particular bidder. This was the first time that a poison pill targeting Yoshiaki Murakami, a prominent activist investor, was successfully used by Toshiba (OTC) Machine last year.

At least five additional firms, including Tokyo Kikai, have introduced or attempted to introduce them since then. Among them, Shinsei Bank plans to seek shareholder approval https://www.reuters.com/business/shinsei-bank-plans-poison-pill-defence-against-sbis-11-bln-bid-sources-2021-09-17 for a poison pill to thwart online financial conglomerate SBI Holdings’ $1.1 billion bid.

Experts claim that there is not enough clarity regarding what Japanese companies are able to do in order to prevent takeover bids from being made.

These experts note that Japanese small-cap firms are especially vulnerable to unwelcome stake-building. Tokyo Kikai is an example of a Japanese small-cap firm with a value just 15 billion Yuan ($130 Million).

Japanese company boards are not allowed to adopt poison pills as a quick way of thwarting a suitor, unlike the United States. Court precedents lead them to believe that shareholders must approve any poison pill adoption, even though it’s not required by law. It is a slow and tedious process.

European law requires that tenders be made for purchases of stakes exceeding a specified threshold. In the UK, this is 30%.

Wataru Tanaka (a Professor of Corporate Law at the University of Tokyo) submitted a letter of advice to the court in support of Tokyo Kikai. She believes that the government should prioritize fixing Japan’s Takeover Rules.

He stated that “Poison pill are the second best solution”.

($1 = 114.3800 yen)



Mike Robinson
Mike covers the financial, utilities and biotechnology sectors for Street Register. He has been writing about investment and personal finance topics for almost 12 years. Mike has an MBA in Finance from Wake Forest University.