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Journal of Corporate Law Studies Volume 5, 2005 - Issue 2
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Original Articles

A Comparative Critique of Cash-Out Mergers in Japan and the US

Masatsugu Yoshioka LL.B. (Tokyo), LL.M. (Harvard); Scholar in Political Science, St Cross College, Oxford. Formerly Special Assistant to the Prime Minister of Japan, Mr Koizumi, and government lawyer at the Japanese Ministry of Economy, Trade and Industry.
Pages 465-506 | Published online: 27 Apr 2015

  • WT Allen and R Kraakman, Commentaries and Cases on The Law of Business Organization (New York, Aspen Publishers, 2003), 465.
  • See infra section B3(a). See also JM Ramseyer, “Takeovers in Japan: Opportunism, Ideology and Corporate Control” (1987) 35 UCLA Law Review 1–64, 21–38.
  • Housei-Shingikai Gijiroku [The Committee's Record] [only in Japanese] (16/12/8, Ministry of Justice of Japan, 2003), 23–24, 32–33, available from http://www.moj.go.jp/index.html, accessed on 20 August 2004.
  • From Weinberger v UOP, Inc, 457 A 2d 701 (Del 1983).
  • Japanese Commercial Code, s 245 [1].
  • K Fujinawa, “Kigyou Saihen Ni Okeru Jitumujou No Kadai To Torikumi” [Problems and Practices on Corporate Reorganisation] (2003) 1656 Shouji Houmu 79.
  • A Japanese law professor, Egashira, explains that most scholars interpret the squeeze out as not permitted under the current Code. K Egashira, Kabushiki Gaisha and Yuugen Gaisha Hou [Laws of Stock Corporations and Limited Liability Companies](Tokyo, Yuhikaku, 2nd edn, 2002), 634. The chief proponent of this interpretation is Osumi; see K Osumi, Kaisha Gappei No Honshitsu, Kaishahou No Shomondai [The Nature of Corporate Merger, Problems of Corporate Law] (Tokyo, Shinshodo, 1973), 390.
  • In US corporate law, Small v Sullivan 245 NY 343, 157 NE 261 reflects the same view.
  • Japanese Commercial Code, s. 220 [1]–[3].
  • LN Lebrun, “Recent Development: Recent Amendments to the Commercial Code of Japan: Impact on Merger & Acquisitions” (1999) 32 Law & Policy International Business 811–23, 811–12.
  • The Japanese Commercial Code, s 353 [2], [5] requires a supermajority vote to conduct stock swap contracts.
  • According to Nakahigashi, a Japanese law scholar, this structure is known as “Japanese squeeze out”. See M Nakahigashi, “M&A Housei No Gendaiteki Kadai” [Recent Problems on M&A Laws] (2003) 1659 Shouji Houmu 48–55.
  • Fujinawa and Hattori's statement, “Workshop Gaikokugaisha Tono Gappei Kabusikikoukan Wo Meguru Houteki Kiritu” [Rules on Mergers and Stock Swaps with Foreign Companies] (2002) 1636 Shouji Houmu 28–49, 31, 32.
  • M Nakahigashi, “Kigyou Soshiki Saihenn Housei No Seibi” [Establishing Rules Regarding Corporate Reorganisation] (2003) 1671 Shouji Houmu 21.
  • K Fujinawa, supra n 5.
  • N Matsuko, “Saikin No Soshiki Saihen No Chouryuu Ni Miru M&A Kanren Housei No Genjou To Kadai Ge” [Looking at Issues On M&A Rules from The Recent Trend of Corporate Reorganisation] (2003) 1653 Shouji Houmu 19.
  • Hattori, supra n 13.
  • E Weiss, “The Law of Take Out mergers: A Historical Perspective” (1981) 56 New York University Law Review 624, 632.
  • Act of June 1, 1925, ch. 10096, s 36, 1925 Fla Laws 134.
  • Arkansas, California and Ohio enacted these provisions by 1931.
  • Act of May 28, 1936, ch. 778, s1(1), 1936 NY Laws 1958.
  • NY had a statute which required short form mergers to be approved by the public service commission.
  • The test which applies to the approval procedure is established by Ministry of Economy, Trade and Industry (METI). However, the approval body differs depending on the industry the acquirer belongs to. For example, if an applicant is a manufacturing company, the METI grants the certification. If the applicant is a bank, the Financial Agency grants the certification according to the standards set by the METI.
  • Wagakuni Sangyou No Katuryoku No Saisei Ni Kansuru Kihonteki Na Shishin [Notification to Enforce the IRA] (No.129, Order of METI, 10 April 2003), 7.
  • Sangyou Katuryoku Saisei Tokubetu Sochi Hou Sekou Kisoku [The Enforcement Regulations of the IRA], s 11 [1].
  • The Enforcement Regulations of the IRA, s 11 [2].
  • Industrial Revitalisation Act, s 12–9.
  • Industrial Revitalisation Act, s 12–7 [2], In comparison with the 90% requirement of Delaware short-form merger, this is a much looser requirement.
  • Supra n 4.
  • Excerpted from RC Clark, Corporate Law (Boston, Little, Brown & Co, 1986), 514.
  • There has actually been no hostile takeover case so far, according to an anonymous METI official interviewed (2 July 2004).
  • Industrial Revitalisation Act, s 12–9. The statute set the requirement of “hitsuyou katsu tekisetsu na”, which means “necessary” and “appropriate”.
  • Industrial Revitalisation Act, s 12–9; The Enforcement Regulations of the IRA, s 25.
  • Industrial Revitalisation Act, s 12–9 [2]; Japanese Commercial Code, s 408–2.
  • Ramseyer, supra n 2, 1–38.
  • D Higashino, “Japanese Economy Division” (2004) 9 Japan Economic Monthly, Jetro, 5. Available at http://www.jetro.go.jp/en/stats/economy/jem0412e.pdf, accessed on 1 March 2005.
  • Recent study shows that the rates of cross-holding and business partner shareholding and leverage rate are declining. These facts might make hostile takeovers less costly than before. See the report from a member of the financial agency's committee, Kinyu Shingikai 23 May Gijiroku, FSA, 2001. Available at www.fsa.go.jp/singi/singi_kinyu/gijiroku/kinyu/dai2/20010523_roku.html, accessed on 1 March 2005 [only in Japanese]. Cf “Nihon No Sangyo Kinyu No Genjo To Kadai” [The Current Financial Problems of Japanese Companies] in Tsuusyou Hakusho 1999 [White Paper on International Trade Policy] (METI Report, 5 November 1999) [only in Japanese], ch. 3–2-2. Available at http://www.meti.go.jp/hakusho/tsusyo/soron/H11/03–02–03.html, accessed on 2 July 2004.
  • Supra n 4.
  • “Challenging Japan's Cozy Corporate Culture”, TIME ASIA, 7 February 2000, vol. 155 no. 5. Available at http://www.times.com/time/asia/magazine/2000/0207/japan.takeover.html, accessed on 1 March 2005. See MAC's webpage. Available at http://www.maconsulting.co.jp/doc-j3003/htm, accessed on 2 July 2004.
  • Kakyu Minshu 22 kan 1 gou, Tokyo High Court, 19 January, 9.
  • Japanese Commercial Code, ss 245–2,349[1], 408–3[1].
  • See The Record of the Committee of Modernisation of Corporate Law, Ministry of Justice, supra n 3, 23–24.
  • FH Easterbrook and DR Fischel, The Economic Structure of Corporate Law (Cambridge, MA, Harvard University Press, 1991), 145. WT Allen and R Kraakman, supra n 1, 474.
  • H Imai, Chushaku Kaishaho (13) [Commentaries on Corporate Law], (Tokyo, Yuhikaku, 1990), 292. But see K Egashira, Ketsugou Kigyou Hou no Rippou to Kaishaku [Legislative Proposals and Doctrines Concerning Company Groups] (Tokyo, Yuhikaku, 1995). He elaborates this topic.
  • Tokyo District Court, 10 February 1983, 1068 Hanji, 110.
  • The Record of the Committee of Modernisation of Corporate Law, Ministry of Justice, supra n 3, 23–24.
  • V Brudney and M Chirelstein, “Fair Shares in Corporate Mergers and Takeovers” (1974) 88 Harvard Law Review 297, 327–30. Brudney and Chirelstein insist “We do not accept the argument that any new business acquisition must belong to P[arent company] merely because P's ‘business’ is diversification, that is, management” at 329. See also Egashira, supra n 44, 275; H Noda, “Sihai Juuzoku kaisha kan ni okeru kousei kijun to sono jikkousei kakuho” [Fairness Standard in the Context of Parent—Subsidiary Merger, and its Effectiveness] (1984) 92–93 Hitotsubashi Ronso 120–30 and 382–92, 120.
  • Easterbrook and Fischel, supra n 43, 139.
  • Noda, supra n 47, 386.
  • S Daigo, “Daisansha Wariate Zoushi Ni Okeru Shinkabu Hakkou Kakaku To Kabunusi No Tomi” [The Price of Newly Issued Stock and the Wealth of the Shareholder in the Context of Third Party Buying the Newly Issued Stock] (1993) 59–1 Keizaigaku Ronshu (University of Tokyo) 76, 86.
  • See supra Section B2(a). See also Ramseyer, supra n 2, 42–50.
  • Ramseyer, supra n 2, 42.
  • See the Shoei case study in this article.
  • Ramseyer, supra n 2, 38–39.
  • Easterbrook and Fischel, supra n 43, 117–19.
  • G Subramanian, “Fixing Freeze Outs” (2004) Harvard Law School Olin Series Discussion Paper No 501, 28.
  • ibid, 28.
  • ibid, 28.
  • The focal point of the argument is on the part of the welfare of the controlling shareholder. Thus the calculation of the controlling shareholder is in question here.
  • Subramanian further discusses in the same article the opportunistic behavior of the controlling shareholder to depress the market value. This is a different problem which will be discussed in another part of this article. See infra Sections C2(c)(iv) and (vi).
  • K Egashira, Kaishanoshihai, Juuzokukankei To Juuzoku Gaisha Shousuu Kabunusino Hogo, [Parent Subsidiary Relations and Protection of Minority Shareholders] 99 houkyou 145,190.
  • Tokyo District Court, 27 April 1969, 679 Hanji, 70. Tokyo High Court, 27 July 1969 715 Hanji, 100.
  • Excerpted from Egashira, supra n 44, 228.
  • Allen and Kraakman, supra n 1, 474.
  • H Kanda and S Levmore, “The Appraisal Remedy and The Goals of Corporate Law” (1985) 32 UCLA Law Review 429–73, 435.
  • Kanda and Levmore categorised the appraisal remedy statute in accordance with three functions. One function is to serve as a “discovery” tool for self-dealing cases, i.e. a quick alternative procedural tool available in fiduciary actions: ibid, 435.
  • Easterbrook and Fischel, supra n 43, 152.
  • Although the model statute expressly grants the court discretion by providing that “fair value” is the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable (emphasis added): MBCA s 13.01.
  • Allen and Kraakman, supra n 1, 312.
  • ibid, 312.
  • In a litigation context, Chancellor Allen left a message that “the incentive of the contending parties is to arrive at estimates of value that are at the outer margins of plausibility”. Cede & Co Technicolor, Inc, No CIV A 7129, 1990 Del Ch LEXIS 259 (Del Ch October 19 1990). Chandler, the successor of Chancellor Allen, also expresses his opinion that “Experience in the adversarial, battle of the expert's appraisal process under Delaware law teaches one lesson very clearly: valuation decisions are impossible to make with anything approaching complete confidence”. Cede & Co Technicolor, Inc, 2003 Del Ch LEXIS 146, 3.
  • Easterbrook and Fischel, supra n 43, 154.
  • Weinberger v UOP, Inc, 457 A 2d 701.
  • V Brudney, “Efficient Markets and Fair Values in Parent Subsidiary Mergers” (1978) 4 Journal of Corporate Law 63–86, 69–73; Clark, supra n 30, 448.
  • Tokyo District Court, 19 April 1971, 22–3/4 Kaminshuu, 446.
  • Tokyo High Court, 15 April 1972, 279 Hanrei Times, 338.
  • Tokyo District Court, 10 February 1983, 1068 Hanji, 110.
  • K Ueyanagi, Kaishahou Tegatahou Ronshuu [Arguments on Corporate Law and Bill Notes Law], 259. Oosumi, Imai, Kaishahou Ron Joukann [Arguments on Corporate Law I], 503; Z Shishido, Chuushaku Kaishahou [Commentaries on Corporate Law], Tokyo, Yuhikaku, 1990), 292; M Yanaga, Shouhou Hanrei Hyakusen [Case Law Selection 100], 178.
  • Yanaga, ibid, 178.
  • Clark, supra n 30, 504.
  • See also Kanda and Levmore, supra n 65, 5–6.
  • Easterbrook and Fischel, supra n 43, 153.
  • Egashira, supra n 7, 656; Yanaga, supra n 78, 178.
  • Egashira, supra n 7, 656.
  • Tokyo District Court, 21 November 1985, 1174 Hanji, 144.
  • Clark calls this “positionally superior insight” (Clark, supra n 30, 449).
  • Easterbrook and Fischel, supra n 43, 138.
  • See http://www1.tcue.ac.jp/home1/abek/htdoc/security/handouts/sec11.pdf [in Japanese only]. Accessed on 2 July 2004. This means that the Japanese market incorporates already published information into the price. Abe reports that many studies show that the Japanese stock market passed a semi-strong test of market efficiency. See also Ramseyer, supra n 2, fn 111 at 43: “Given the size of the Japanese capital market, one would expect it to be reasonably efficient.”
  • The Code provides that when the interested shareholder votes for the decision of the shareholders’ meeting, a grossly unfair decision is voidable. The plaintiff must show that the decision is grossly unfair, failing which the transaction would be upheld. In comparison with Delaware law, the Japanese Code is less restrictive in two ways. First, even if the self-dealing is recognised, the plaintiff still has a burden of proof. Secondly, since the test of scrutiny is not “entire fairness” but rather “not grossly unfair”, the discretion of the majority shareholder is greater than it would have been in Delaware.
  • G Subramanian, “Fixing Freeze Outs” (2004) Harvard Law School Olin Series Discussion Paper No 501, 29.
  • Z Goshen and Z Wiener conclude that “ironically, the less reliance courts put on market prices, the more accurate are market prices as a reflection of fair value”. ibid, 29.
  • For example, in order to ease the initial difficulty of fund raising by entrepreneur in Japan, the state-operated policy bank plays a significant role in investing in small private entities. Special measures for entrepreneurs are taken to address this problem.
  • Gonsalves v Straight Arrow Publishers, Inc, 1996 Del Ch CA No 8474 WL 696936.
  • CH Henrich, “Game Theory and Gonsalves: A Recommendation for Reforming Stockholder Appraisal Actions” (2001) 56 Business Lawyer 697–733, 704–19. Not grossly unfair Japanese Code (more loose) Fair Entirely fair Delaware court (more strict) Fig. 2. Entire Fairness Test in the Delaware Court and Grossly Unfair Standard in the Japanese Code
  • The Major League Baseball Player Association adopted FOA in 1973 to settle player salary disputes. See CH Henrich, ibid, 706.
  • Gonsalves v Straight Arrow Publishers, Inc II, 701 A 2d, 357, 358 (Del 1997).
  • French Commercial Company Law (Loi n degrees ss 66–537 du 24 juillet 1966 sur les societes commerciales) ss 377, 378. See Kanda and Levmore, supra n 65, fn 98, Egashira, supra n 7, 644.
  • Allen and Kraakman, supra n 1, 481.
  • See Nakahigashi, supra n 14.
  • Glassman v Unocal Exploration Corporation, 777 A 2d 242 (Del 2001).
  • In re Siliconix Incorporated Shareholder Litigation, 2001 WL 716787 (Del Ch 2001).
  • Solomon v Pathe Communications Corp, 672 A 2d 35, 39 (Del 1996).
  • In re Pure resources, Inc, Shareholders Litigation, 808 A 2d 421 (2002).
  • In re Pure resources, Inc, Shareholders Litigation, 808 A 2d 421 (2002).
  • It is also true that nearly no substantial duties with regard to offer prices are imposed on the acquirer by the Japanese Stock Exchange Act, although the Japanese Stock Exchange Act, s 27–2 [2] mandates that the tender offer period must be set forth from twenty days to sixty days and s 27–2 [3] mandates that offer prices must be equal to sellers.
  • See, eg Nakahigashi, supra n 14.
  • See supra Section C1(c)(ii).
  • See also Easterbrook and Fischel, supra n 43, 179–80.
  • G Subramanian, “Post-Siliconix Freeze-outs: Theory, Evidence and Policy” (2004) Harvard Law School John Olin Series Discussion Paper No 472. Available at http://www.law.harvard.edu/programs/olin_center/, accessed on 2 July 2004. Some scholars say this result is improper. See BM Resnick, “Note: Recent Delaware decisions may prove to be ‘Entirely Unfair’ to minority shareholders in parent merger with partially owned subsidiary” (2003) Columbia Business Law Review 253–83, 280; JE Abramczyk et al, “Going-private ‘Dilemma’?—Not in Delaware” (2003) 58 Business Lawyer 1351–71, 1352 (Delaware develops appropriate rules).
  • RJ Gilson and JN Gordon, “Doctrines and Markets: Controlling Controlling Shareholders” (2003) 152 University of Pennsylvania Law Review 785–843, 827–41; KC Cannon, “Augmenting the Duties of Directors to Protect Minority Shareholders in the Context of Going-private Transactions: The Case for Obligating Directors to Express a Valuation Opinion in Unilateral Tender Offers after Siliconix, Aquila and Pure Resources” (2003) Columbia Business Law Review 191–252, 240–52. But Pritchard says “Minority shareholders generally did not acquire their minority status by accident. They invest in a public offering by a controlling shareholders, in which case the risk of ‘unfair’ expropriation was incorporated into the price that they paid for their shares.” After pointing out that freeze out events are not corporate control transactions, he continues “should the controlling shareholder have to pay a second control premium, in this case a ‘complete’ control premium?” Pritchard argues for ex ante pricing adjustment which will resolve equitable concern for minority shareholders. This is much the same position as this paper. See AC Pritchard, “Tender Offers by Controlling Shareholders: The Specter of Coercion and Fair Price” (2004) 1 Berkeley Business Law Journal 83–111, 103.
  • Tokyo High Court, 31 January 1994, Shouho Hanrei Hyakusen 180.
  • See supra Section C.

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