Washington International Law Journal


Toshihiko Shimizu and Toshihiro Igi are the original authors of the article. It was translated into English by Christopher J. Kiodama.


The emergence of a market for corporate control in Japan is a phenomenon that many commentators on Japan’s business and legal environs had been anticipating since the turn of the new millennium. A gradual decline in corporate crossshareholding and stable shareholding by financial institutions along with a concomitant increase in foreign and individual shareholders, a significant number of inefficient firms still being affected by Japan’s prolonged recession until recent years and trading at prices below their market value, and Commercial Code revisions making the legal environment more conducive to merger and acquisition activity and providing for more flexible restructuring mechanisms, all pointed to a potential hostile takeover trend akin to that which occurred in the United States during the 1980s. However, it was not until early 2005, when Takafumi Horie, CEO of the internet firm Livedoor, made an unsolicited bid for majority control over Nippon Broadcasting System, Inc., that the hostile-takeover era seemed to have officially arrived upon Japan’s doorstep. The ensuing media frenzy surrounding the rare hostile takeover attempt and the eventual decision by the Tokyo District Court to block Nippon Broadcasting System, Inc.’s issuance of stock purchase warrants to a friendly shareholder to thwart the takeover attempt compelled Japan’s government and business sectors into action. The result was a wide embrace of an ntitakeover mechanism commonly known as the “poison pill.” A Japanese manufacturer of hi-tech measuring devices was the first to officially act, when on March 14, 2005, just days after the Tokyo District Court’s first ruling in the Nippon Broadcasting case and a couple of months before the Japanese government would respond with its recommendations on the adoption of anti-takeover mechanisms, the board of directors of Nireco Co. voted to adopt a poison pill as a preliminary antitakeover device. The Nireco poison pill authorized the issuance of stock purchase warrants to the company’s current shareholders. These warrants could be exercised to dilute a hostile bidder’s shareholding in circumstances where the board of directors deems the acquisition not to be in the long-term interests of the company. However, the Nireco poison pill did not go unchallenged. On May 9, 2005, an investment fund owning 6.8% of Nireco’s outstanding shares filed a petition for a provisional injunction against the poison pill, arguing that the issuance of stock purchase warrants in the absence of a hostile bidder was grossly unfair because it would cause unforeseen financial harm to existing shareholders as well as to future shareholders. This Article focuses upon the attempt by Nireco’s board of directors to implement what would have been Japan’s first poison pill and the subsequent decision by the Tokyo courts to enjoin the preliminary anti-takeover device as grossly unfair. The authors examine the substantive and procedural characteristics of the poison pill, including the deficiencies prompting the Tokyo District Court to block Nireco its implementation, as well as the potential impact of the ourt’s decision on future business practice in Japan. By placing the court’s decision in the Nireco case within the history of jurisprudence relating to corporate issuances of new shares or stock purchase warrants challenged as grossly unfair under Japan’s Commercial Code, now the Company law, the authors seek to emphasize (1) the court’s shift away from the main purpose rule standard of judgment in favor of a reasonable means standard for evaluating anti-takeover mechanisms, whether adopted in the face of a hostile acquirer or simply as a preliminary anti-takeover device; (2) the court’s addition of pure economic harm to the list of potential harms to shareholders; and (3) lingering questions regarding the role of the general shareholder meeting in approving an anti-takeover mechanism. While the authors eschew any strong stance on the appropriateness of the poison pill within Japan’s corporate governance structure, they do predict that the judiciary will play a prominent role in the future development of anti-takeover mechanisms like the poison pill, in part due to the developments in the Nireco case.

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