FDI and Corporate Governance in Japan

Michael RylandPartner 21 July 2008

204733349_2

Geread DooleyLawyer

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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

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FDI regulation in Japan

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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

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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

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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"

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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

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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)

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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."

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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

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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

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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.