Japan Legal Update Vol. 48 | July–August 2019
Japanese Government Issues M&A Guidelines
On June 28, 2019, Japan's Ministry of Economy, Trade and Industry issued the "Fair M&A Guidelines: Enhancing Corporate Value and Protecting Shareholders' Interest" ("M&A Guidelines"). The guidelines are nonbinding, although it is expected that courts will view compliance with the framework as evidence of fairness when the share price in an M&A transaction is disputed by minority shareholders as outlined below.
The M&A Guidelines replace the 2007 "Guidelines for Management Buyout to Improve Corporate Value and Secure Fair Procedures" ("MBO Guidelines") and reflect recent experiences of Japanese companies and changes in the environment surrounding mergers and acquisitions. While the MBO Guidelines had covered only management buyouts, the M&A Guidelines also apply to acquisition of a publicly listed company by its controlling shareholder.
The M&A Guidelines provide certain practical measures to encourage fairness in M&A transactions ("Measures to Ensure Fairness") aimed at protecting minority shareholders' interests while enhancing the corporate value of the target company.
For example, the M&A Guidelines advise that when a target company receives an acquisition offer, it should establish a special committee composed of independent directors and other independent members, such as independent statutory auditors or outside advisors, as soon as practicable. The M&A Guidelines also dictate that the target's board of directors should generally defer to such special committee's recommendations.
The M&A Guidelines recommend companies take other measures, including conducting a market check (i.e., ensuring an opportunity for potential buyers to offer a counterbid) and enhancing disclosure to minority shareholders. A target company is not necessarily required to take all the Measures to Ensure Fairness provided in the M&A Guidelines but should consider the measures in the context of each M&A transaction.
While the M&A Guidelines are nonbinding, they present best practices for M&A transactions in Japan and it is expected that courts determining the "fair" price in disputed transactions will tend to respect the agreed price by the parties when target companies comply with the Measures to Ensure Fairness. The Supreme Court already issued a decision based on the same fairness framework provided in the M&A Guidelines, although the case predates the issuance of the guidelines (please see the August 2016 issue of this newsletter).
The M&A Guidelines will have a material impact on the M&A practice in Japan. Parties should review and consider the M&A Guidelines when implementing transactions, and attention should be paid to how the practice will change based on the M&A Guidelines.
Prior Notification of Inward Direct Investment Required for Additional Types of Businesses
On May 17, 2019, the Japanese government published a notice adding new types of domestic businesses for which a submission of prior notification concerning inward direct investment is required under the Foreign Exchange and Foreign Trade Act, before an investment or acquisition by an overseas entity can be undertaken. In order to protect Japan's security, the requirement will now apply to certain types of additional businesses such as manufacturers of integrated circuits. Foreign investors making inward direct investments into such newly enumerated types of businesses on or after August 31, 2019, will be required to submit a prior notification.
U.S. Senate Approves Protocol to Amend U.S.–Japan Tax Treaty
As previously reported in the May 2015 issue of this newsletter, the protocol to amend the U.S.–Japan Tax Treaty ("Protocol") was signed in January 2013 and approved by the Japanese Diet in June 2013. However, it had since been pending ratification in the United States due to opposition in the Senate. The Protocol was finally ratified by the Senate on July 17, 2019, and the instruments of ratification will be exchanged between Japan and the United States, upon which the Protocol will enter into force. The Protocol will apply to: (i) taxes withheld for amounts paid on or after the first day of the third month next following the date on which the Protocol enters into force ("Effective Date"); and (ii) other taxes for taxable years beginning on or after the first day of January next following the Effective Date. If the exchange of instruments is not delayed, treaty benefits such as the exemption from source-country taxation on interest payments may be available before the end of this year.
Amendment to the Antimonopoly Act Enacted
The Act to Partially Amend the Act on Prohibition of Private Monopolization and Maintenance of Fair Trade was enacted on June 19, 2019, and promulgated on June 26, 2019. For details, please see the April 2019 issue of this newsletter.
JFTC Concludes Memorandum on Cooperation with Competition Authority of China
On May 27, 2019, the Japan Fair Trade Commission ("JFTC") concluded the Memorandum on Cooperation with the State Administration for Market Regulation, the competition authority of China. For the JFTC's enhanced cooperation in enforcement with foreign competition authorities, please see the May 2016 issue of this newsletter.
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