International | May 08 2006
By Chris Shaw (Tokyo)
Improving economic conditions have helped drive Japan’s Nikkei Index up by more than 40% from its lows of a few years ago, but investors wondering what could continue to drive gains should probably zoom in on changes to Japan’s securities laws.
The changes, which will come into play from May next year, are designed to both make takeovers and mergers easier and to provide companies with more options in terms of defending themselves against such moves. While these may appear contradictory statements, market experts suggest the likely outcome is an increase in corporate activity in the future.
Looking at the changes from the viewpoint of acquirers, the rule changes will allow companies to offer alternatives such as cash or other securities as part of the terms of a deal, rather than just their own shares as is currently the case. This includes the offering of shares in their foreign parent, a change that should help foreign companies interested in acquiring Japanese corporations. Under the previous rules, foreign companies were essentially prevented from making any such acquisitions.
Also increasing the ease with which acquisitions can be made is the new rule allowing the company making the purchase to do so without shareholder approval if the target represents less than 20% of its own market value. Parent companies holding 90% or more of a subsidiary will also be allowed to buy the balance without a shareholder vote, changes that will make it easier for larger companies to rearrange their corporate structures.
Companies under threat from acquisition are also to be given more opportunity to defend themselves via share issues, with issues of so-called "Golden Shares" to friendly shareholders designed to allow these shareholders to vote against any merger proposal one example of the changes.
On first viewing, this would appear to work against an increase in merger activity but market experts suggest the restrictions on the issuing of such shares should prevent misuse, as it must be shown any such issue won’t be against the best interests of ordinary shareholders.
As a result, investors can expect the Tokyo Stock Exchange (TSE) to be very tough on the issue of such shares, with conditions already in place to ensure the rights of smaller shareholders are protected.
Foreign market participants would argue such changes are not before time, but the new laws being introduced will bring the Japanese market more into line with other markets globally, an outcome that should prove beneficial in the long-term for investors.
