JAPAN Law and Practice Contributed by: Akira Matsushita and Hideki Ben, Mori Hamada
soft laws, including those promulgated by the CGC and the SC, also affect shareholder activism. 11.2 Aims of Shareholder Activism The most common aim of shareholder activism in Japan is to improve the capital efficiency of Japanese companies. Taking into account the fact that there are many listed companies in Japan with a price-to-book ratio (PBR) of well below 1.0, on 31 March 2023 the Tokyo Stock Exchange requested companies listed on the Prime Market or Standard Market of the Tokyo Stock Exchange to analyse their own cost of capi- tal and return on capital, formulate plans to improve them, and disclose such plans to the public. Given this request, activist shareholders often demand that companies with a low PBR increase their shareholder return by conducting a buyback of their shares or increasing dividends. Activist shareholders also often urge companies to carve out their non-profitable or non-core businesses and sell their assets that are not utilised or not related to their primary business, includ- ing cross-holding shares and real estate. Activist shareholders often demand that the compa- ny’s management conduct a strategic review of the company’s businesses and business plans by retain- ing an outside consulting firm. In recent years, activist shareholders have often provided the company with their own detailed analysis on business challenges of the company, and demanded that the company’s management appropriately address or respond to such challenges. If they consider that a company is not adequately responsive to their demands, some activist hedge funds may push the company to elect a person rec- ommended by such activist funds to serve as a direc- tor on the company’s board of directors. This person would often be a manager or partner of the activist funds, a person who has experience in the manage- ment of other companies in the industry to which the company belongs, or a person who has expertise in capital allocation or restructuring. Improving corporate governance is also a common aim of shareholder activism. Although the corporate governance of many listed companies has changed as a result of the application of the CGC, activist share-
holders have continued to advocate for changes in corporate governance – for example, with regards to adopting stock price-linked remuneration for direc- tors, divesting of cross-holding shares, and abolishing takeover defence measures. Activist shareholders often demand that the compa- ny’s management conduct M&A transactions, such as a sale of the company to another company or investor, or a merger or business integration of the company with another company. Since activist shareholders can often realise a premium over the market price within a short period of time through such M&A transactions, such transactions remain one of the most important agendas for activist shareholders. Activist shareholders are also engaging in shareholder activism with respect to announced M&A, including mergers, share exchanges or tender offers, in which the support of a certain number of shareholders is necessary to successfully complete such transac- tions (bumpitrage). Activist shareholders demand that the company amend certain terms that are, in their view, inappropriate, such as the purchase price. These cases often occur in management buyouts and acquisitions by a controlling shareholder that involve conflicts of interest between management and/or a controlling shareholder on the one hand and minor- ity shareholders on the other. This M&A activism may result in a change in the acquisition structure or increase of acquisition costs for the transaction. After completion of the transaction, some activist share- holders also exercise their appraisal rights as dissent- ing shareholders, and file a petition to the court for a determination of the fair price for the relevant shares. 11.3 Shareholder Activist Strategies Most activist shareholders initiate their actions by sending a private letter to the management of listed companies, stating their demands to, or requesting to hold a meeting with, the management. At a later and more aggressive stage, activist shareholders may engage in public campaigns in various ways, such as by: • issuing press releases;
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