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Monday, Dec. 18, 2006

JAPANESE PERSPECTIVES

Triangular mergers and the argument for stringent controls


By YO OTA

With the ban on so-called triangular mergers scheduled to be lifted in May, debate in Japan -- which has occasionally involved interested parties in the United States and Europe -- has focused on determining the conditions under which such cross-border takeovers should be allowed.

In triangular mergers, the Japanese acquisition vehicle of a foreign firm can take over another Japanese company by swapping the shares of its parent firm for all or a sizable portion of the target's shares.

However, I must point out that some of the arguments made by the U.S. and European business organizations are based on misunderstandings of the differences between their legal systems and Japan's.

The Japanese business community argues that, in light of the need to protect the rights of individual shareholders, triangular mergers involving the shares of foreign firms not listed in Japan should be approved by two-thirds of the shareholders in the target company who have voting rights and half or more of its total shareholders.

On this point, for example, the European Business Council argues that such triangular mergers should be approved only by two-thirds of the target company's shareholders with voting rights, and that imposing more stringent conditions is inappropriate because it impedes foreign investment in Japan.

But the EBC's argument fails on some key points.

There are two ways to do a cross-border takeover using shares from the acquiring firm as compensation: triangular mergers and exchange tender offers, in which the acquiring company makes a tender bid for the stock of the target firm by offering its own shares as compensation.

It should be noted that the first method is basically unavailable when the takeover target is a European company. The second method, however, is available for any cross-border takeover targeting a U.S., European or Japanese firm.

When the EBC refers to "share swaps," it is referring only to the second option, an exchange tender offer, which is fully available in Japan.

The difference between the two is that in a triangular merger, minority shareholders in the target company can be forced to swap their shares for those of the acquiring firm if the merger has been approved at the shareholders' meeting of the target firm. This is not true in an exchange tender offer.

Unlike shareholders in European companies, shareholders in Japanese companies being acquired in triangular mergers may have to swap for shares of an acquiring foreign firm whether they like it or not, if such a merger is approved at a shareholders' meeting after the ban is lifted. This obviously creates a problem for individual shareholders, who may then have difficulty trading their shares at overseas stock exchanges.

In terms of information disclosure, a Japanese company that wishes to take over a U.S. firm in a triangular merger will need to recalculate and disclose its financial statements under the generally accepted accounting principles in the United States. However, a U.S. company similarly taking over a Japanese firm will be under no obligation to recalculate its financial statements under generally accepted accounting principles in Japan, even after the ban on triangular mergers is lifted.

Given such points, the author believes it is only natural and reasonable that a set of stringent restrictions be imposed to protect the interests of individual Japanese shareholders when Japanese companies are being acquired in triangular mergers.

The government has been trying to get Japanese consumers to put more of their savings into the stock market. Now it is the government's duty to protect the interests of those shareholders.

Yo Ota is a lawyer with Nishimura & Partners. He is also a lecturer at Kyoto University Law School.


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