Japan firms opt for ‘poison pill’ defence

More than 15 per cent of Japanese companies listed on the first section of the Tokyo Stock Exchange have implemented poison pills to protect themselves against hostile takeovers, following legal changes that make it easier for foreign firms to buy their domestic counterparts.

In the past five months alone, 160 companies have implemented takeover defence measures, outstripping the 151 companies that adopted poison pills during the 2006 calendar year, according to Nomura Securities.

The legal changes, implemented this month, makes it easier for foreign companies to buy Japanese concerns using shares rather than cash, through so-called triangular mergers. The move has fuelled fears of a flood of hostile takeovers by foreign companies and a transfer of prized technology out of Japanese hands, particularly in the steel sector.

Of all the firms that have adopted poison pills, the iron and steel sector remains the most active, with over 21 per cent of firms in the industry having introduced defences since last year, according to Nomura.

Firms targeted by analysts as the most in need of consolidation have also been the most active in erecting defenses. Nearly 15 per cent of companies in the pulp and paper sector have poison pills, and more than 15 per cent of precision instrument makers have adopted takeover defenses.

Japanese steelmakers have rushed to defend themselves against potential hostile bids, following Mittal's takeover of Arcelor last year. The biggest concern is that a foreign firm could gobble up their advanced steel-making technology. Nippon Steel and JFE, the country’s two leading steelmakers, supply Toyota, Honda and Nissan with the bulk of their steel sheet for use in automobile manufacturing.

But with no major hostile bid ever having succeeded in Japan, the actual implementation of poison pills is still largely uncharted territory. “About half of listed companies in the US still have poison pills but it is used as a tool for negotiating, such as trying to obtain a higher bidding price,” said Kengo Nishiyama, strategist at Nomura Securities in Tokyo. “In Japan, poison pills are still largely untested – it is unclear whether they are used to protect incumbent managers or to raise shareholder value.”

Critics say the lack of a culture of corporate governance, truly independent directors and a knowledgeable and active shareholder base makes the poison pill in Japan simply a mechanism to entrench management. “Poison pills are fine as long as there is a genuine independent arbiter to trigger the pill or not,” said Casper Lawson, partner at Linklaters in Tokyo. “I am sceptical whether so-called independent committees [at Japanese companies] are truly independent.”

The survey said that a total of 338 listed Japanese companies, or nearly one in ten, had adopted anti-takeover measures. In Japan, 75 per cent of companies have “advance-warning”-type poison pills, in which independent committees make decisions as to whether to activate the takeover defence, which usually involves issuing new shares to dilute the acquirer’s stake.

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