FDI and Corporate Governance in Japan Michael Ryland Partner 21 July 2008 204733349_2 Geread Dooley...

FDI and Corporate Governance in Japan

Michael RylandPartner 21 July 2008

204733349_2

Geread DooleyLawyer

SLIDE 2 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008

Topics

• FDI regulation in Japan

• Foreign Exchange and Foreign Trade Law

• FDI case study

• AREITs in Japan

• Takeovers law in Japan

• Takeover Defence Guidelines - Regulatory response

• Bulldog Sauce case – Supreme Court's stance

SLIDE 3 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008

FDI regulation in Japan

SLIDE 4 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008

A few FDI facts on Japan

0102030405060708090

100

Inbound FDI as % of GDP

Countries

• US$28.8billion net inbound FDI in 2007

• Japanese Government seeking to double inbound FDI to 5% of GDP by 2010

• US$50 billion net outbound FDI in 2006

SLIDE 5 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008

Foreign Exchange and Foreign Trade Law (FEL)

• 「外国為替及び外国貿易法」（「外為法」）"Gaikoku - Kawase - Oyobi - Gaikoku - Boeki - Ho" ("Gaitame - Ho")

• Deals with both "Outward Direct Investments" and "Inward Direct Investment"

• "Inward Direct Investment" covers almost all investment activities of foreign company in Japan

SLIDE 6 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008

1998 amendments to FEL

1. Change to approval process: from "Prior Notification" to "Post Facto Report"

2. Change of name: from "Foreign Exchange and Foreign Trade Control Law" to "Foreign Exchange and Foreign Trade Law"

SLIDE 7 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008

Three types of approval/ notification regulation:

Post Facto Report

Prior Approval

Prior Notification

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Example - acquiring shares in a Japanese company• Target: Japanese company established in

Japan ("Kabushiki Kaisha")

• Foreign investor: foreign company

• "Post Facto Report" or "Prior Notification"?

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Exemptions to both Prior Notification and Post Facto Report

1. The foreign investor acquires shares from another foreign investor; or

2. The number of shares held by a foreign investor (and certain affiliated entities) as the result of the acquisition is less than 10% of total shares ("Percentage Test")

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Questions to be examined:

Q1. "Percentage Test":

• less than 10% → no filing required

• 10% or more → go to Q2

Q2. "Industry Test" and "Country Test":

• If a Non-Sensitive Industry and Eligible Country → "Post Facto Report"

• If A) Sensitive Industry and/ or B) Ineligible Country → "Prior Notification"

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Other requirements:• "Law Concerning Prohibition of Monopoly and

Preservation of Fair Trade"「独占禁止法」（ "Dokusen - Kinshi - Ho" ） or「独禁法」（ "Dokkin - Ho"）

• "Securities and Exchange Law" 「証券取引法」（ "Shouken - Torihiki - Ho" ） or「証取法」（ "Shoutori - Ho"）

• Note - "Financial Instruments and Exchange Law" amended the "Securities and Exchange Law" in 2006

SLIDE 12 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008

A-REITS in Japan

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Investing in Japanese real estate

Currently 4 ASX listed property funds with 100% Japanese real estate assets

• Babcock & Brown Japan Property Trust

• Challenger Kenedix Japan Trust

• Galileo Japan Trust

• Rubicon Japan Trust

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Investment model

Responsible Entity

"Trust" Lender

Custodian

Investors (Retail / Wholesale)

Asset

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Investment issues• Acquire title to land?• Acquire title to trust beneficiary certificate?• Investment vehicles: TK, TMK

• Acquire equity?• Board positions? NB residency

• Management arrangements• FIEL licensing implications

• Borrowing (banks, bank accounts, security)• Entering into contracts• Making distributions

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Takeovers in Japan

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An overview - "Streamlining the Market for Corporate Control: A Takeovers Panel for Japan?" • Japanese takeover activity on the rise

• Catalyst: Takafumi Horie and the Livedoor case

• Unintended consequences

• Corporate Japan – "poison pill" defences

• Japanese government – "Guidelines Regarding Takeover Defences for the Purpose of Protection and Enhancement of Corporate Value and Shareholder's Common Interests" ('Takeover Defence Guidelines') (May 2005)

SLIDE 18 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008

An overview - "Streamlining the Market for Corporate Control: A Takeovers Panel for Japan?"

• "Takeovers Panel" in Australia

• Primary forum for resolving takeover disputes

• Aims to bring speed, specialist expertise and commercial pragmatism to the dispute resolution process

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"Japanese corporate

environment is ripe for an innovation

such as a Takeovers Panel based on the Australian model."

SLIDE 20 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008

Japanese takeover activity on the rise

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Takeover Defence Guidelines: the government’s response (1)

• Recognises pros and cons of M&A

• Endorses US-style defensive measures to avoid market damaging M&A activity

• Implicit approval of Delaware takeover jurisprudence, home of the poison pill defence

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Takeover Defence Guidelines: the Government’s Response (2)

• Three main principles:

1.Enhance ‘corporate value’ and common interests of all shareholders

2.Disclosure to shareholders

3.Conform to Japanese law

SLIDE 23 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008

Reliance on missing infrastructure? (1)

• No guidance on timing of poison pills

• Who monitors corporate management?

• The Policemen:

• Shareholders

• Independent directors

• Courts

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Reliance on missing infrastructure? (2)

• Shareholders

• New presence - foreign share ownership from 6.3% in 1993 to 23.7% in 2005

• Shareholder activism on the rise

• But…

• Financial institutions and business corporations still hold 54.8% of all shares on the TSE

• Since 2005 - 353 Japanese companies had sought approval for defensive measures at shareholders meetings

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Reliance on missing infrastructure? (3)

• Independent Directors

• Still in its infancy – 2002 Commercial Code

• Limited impact?...

• Definition of 'independent' director

• Optional - between 2002 and 2004 only 3% of eligible firms, adopted the amendment

SLIDE 26 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008

Reliance on missing infrastructure? (4)

• Courts

• Will need to build a body of law from the ground up

• Bulldog Sauce case….

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Steel Partners v. Bulldog Sauce Co. Ltd (Bulldog Sauce Case)

• State of play before Bulldog Sauce case – very limited number of cases had considered defensive measures in takeover bids

• Rationale of the main decisions - management’s authority to manage the company comes from the shareholders through their appointment

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Bulldog Sauce Case - Facts• 18 May 2007 - Steel launches takeover bid on

– offered 1,584 yen/ share to acquire100 per cent of Bulldog's shares.

• Bulldog and Steel exchange questions and comments in writing.

• Bulldog implement's a defensive measure – allocated stock acquisition rights with discriminatory terms against Steel.

• Bulldog also seeks endorsement by shareholders at AGM on 24 June 2007 - 83.4% of total shareholders approve.

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Bulldog Sauce Case - Facts

• Steel sought preliminary injunctive relief

• Three Japanese courts reviewed and decided the case from the viewpoints of whether such allocation:

(i) conflicts with the principle of equal treatment of shareholders (kabunushi byodo no gensoku); and

(ii) constitutes a materially unfair issuance (ichijirushiku fukosei na hakko).

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Supreme Court Decision

• All three courts allowed the takeover defence - but on quite different grounds.

• Supreme Court paid high regard to the resolution of the shareholders’ meeting in determining the necessity of the defensive measure.