JAPAN Law and Practice Contributed by: Hajime Tanahashi, Takayuki Kihira, Kenichi Sekiguchi and Akira Matsushita, Mori Hamada
compliance with their fiduciary duties, and they are also under pressure from shareholders, including shareholder activists and institutional investors. In this regard, as discussed in 9.1 Hostile Tender Offers , the Takeover Guidelines provide a code of conduct for directors and boards of directors of target companies when they receive acquisition proposals, and provide that they should act in a manner that allows them to be responsible for explaining (afterward) the rationale behind their reactions to acquisition proposals and their decisions on whether to accept acquisition pro - posals. In general, it is not very common in Japan for share - holders or other stakeholders in a company to bring litigation against the company or its directors in con - nection with M&A transactions. Under Japanese law, it is not easy for stakeholders to enjoin in advance the consummation of any type of M&A transaction because the grounds for an injunction are generally limited to a violation of law or the company’s articles of incorporation. The general view is that a violation by directors of their duties of care and loyalty is not deemed a violation of law. 10. Litigation 10.1 Frequency of Litigation The exception is that shareholders may seek injunc - tive relief against: the issuance of stock or stock options by the company pursuant to the Companies Act based on certain grounds, including that the issu - ance is unjust; and a short-form merger or exercise of the Squeeze-Out Right, based on the grounds that the consideration is grossly improper. 10.2 Stage of Deal Shareholders are more likely to bring legal action in connection with M&A transactions involving conflicts of interest, such as MBOs or squeeze-out transac - tions conducted by a controlling shareholder, after the transactions are completed. The most common litigation in Japan is litigation with respect to appraisal rights of shareholders. Moreover, shareholders some - times file a suit against directors or corporate auditors of a target company for recovery of monetary dam -
ages suffered as a result of the violation of their duties of care and loyalty. 10.3 “Broken-Deal” Disputes In early 2020, some pending Japanese M&A transac - tions that were negotiated before the COVID-19 crisis were suspended or cancelled as a consequence of the pandemic. However, there has been no reported important court decision with respect to the triggering of material adverse change clauses in M&A transac - tions, and there is no specific trend regarding such clauses. Although public shareholders have not historically had much influence on the management of companies in Japan because of cross-shareholdings, according to a recent survey, Japan is one of the countries most tar - geted by public campaigns conducted by shareholder activists. Since the introduction of Japan’s Corporate Governance Code in 2015 and Stewardship Code in 2014, there has been a significant change in the environment surrounding the corporate governance of Japanese listed companies and the mindset of their management. 11.2 Aims of Activists 11. Activism 11.1 Shareholder Activism After the issuance in 2020 of the Practical Guidelines for Business Transformation by METI, which discusses issues concerning business portfolios and business transformations of Japanese companies, there was an increase in the number of demands by activists against Japanese listed companies for divestitures or spin-offs of non-core or unprofitable businesses. Recently, there has been an increasing number of demands by activists for M&A transactions, including a sale of the company itself. Referring to the Takeo - ver Guidelines, activists often demand that companies sincerely consider a third party’s takeover proposal, and the activists sometimes even arrange takeover proposals from third parties, such as PE funds. As discussed in 11.3 Interference With Completion , activists are engaging in so-called bumpitrage with
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