Corporate Finance and Governance: Japan-Europe Comparisons

Next, Professor CORBETT directed the following questions to Professor GOERGEN.

Could you give us a short description of the Delaware System?

I would like to know what kind of influence different types of takeover defense and minority shareholder protection legislation will have on the structure of ownership and what sort of influence changes in the legal rules will have on the structure of ownership and corporate governance.

Professor GOERGEN responded to these questions as follows:

Unlike the UK City Code, the Delaware System really works while courts are making decisions.

Concerning the impact of different types of takeover rules on the structure of corporate ownership, I would like to concentrate on the mandatory bid rule. And I would like to concentrate on the fact that Japan has not adopted the mandatory bid rule as in the case of European countries. If it does adopt the rule, and combines it with the principle of equal treatment of shareholders, the cost of transfer of control will rise in terms of the block holder system.

Next, Professor CORBETT directed the following questions to Mr. KUSAKABE.

I would like to ask your views on why Japan has chosen the court-based system.
I would like to hear your personal views about how people in Japan rate the trade-off in the structure of takeover rules between protecting minority shareholders and making takeover as easy as possible.

Mr. KUSAKABE responded to these questions as follows:

Among hostile takeovers are offers that realize higher corporate values than the existing team of managers can accomplish, and also those that can produce only low corporate values. Anti-takeover measures which are blind to the former while working against the latter are desirable. The Delaware-based or court-based system will make possible a judgment first by managers as a corporate value base, and then by shareholders and, finally, by a court of law. This approach is worth our respect since it leads to mergers and acquisitions of high quality and heads off those that are not. Meanwhile, an approach that will remove partial bids in the TOB rules has a high degree of transparency and is easy to understand, but there are also partial tie-up offers that will raise corporate values. The Delaware-based system has been chosen because of its emphasis on judgments based on corporate value, rather than on the transparency and simplicity of the process.

It is difficult to strike a balance between the endeavor to promote mergers and acquisitions as much as possible and the protection of minority shareholders and the rights of labor. I think that Japan, in planning its system, is opting to make rules that would rather encourage the acceleration of mergers and acquisitions. But sufficient discussions have not been held to date, and it is still an open question how we should realign the protection of labor and minority shareholders in relation to friendly or hostile takeovers. This is a question we in Japan will be discussing in the future.

Next, Professor CORBETT directed the following questions to Mr. OKITSU.

I would like to hear your views on whether there are some other aspects of the Japanese economic system that need to be addressed in order to make corporate reorganization easier and faster in Japan.

With the population aging, preserving employment is no longer the only means of providing economic security to workers in Japan today. I would like to hear your views on how this factor will affect the attitude of managers toward corporate restructuring.

Mr. OKITSU responded to these questions as follows:

Regarding Japan's economic system, the disposal of non-performing loans has not made much progress at regional banks. It is necessary to reorganize those regional banks in the future. I also have my doubts on whether household savings will start circulating in the economy as a whole after the privatization of Japan's postal services.

Labor is being diversified into three groups: regular employees at major corporations, part-timers and temporary employees sent from agencies, and casual workers that are akin to those that are referred to as NEET (not in employment, education or training). It is important to consider how to re-educate those in the NEET group and to bring them into the labor market. No serious problem would arise even if corporate reorganization were to result in the loss of work for employees, provided social security measures like pensions existed to protect them, but the reorganization of the pension system in the future is a prerequisite. We also need to try to reduce the rigidity in the portability of pensions.

Next, Professor CORBETT directed the following question to Dr. SHEARD:

I would like to hear your views on what role institutional investors play in corporate governance in Japan and whether there are differences in the roles of foreign and Japanese institutional investors.

Dr. SHEARD responded as follows:

There is a shift going on from relationship investors like main banks and transaction partners to so-called arms-length investors such as institutional and retail investors. In the latter group, there are extremely close similarities between Japanese and foreign investors in terms of their motivation and way of thinking. It is foreign investors, however, who have shown confidence in the Japanese economy and in the structural reforms. Cash and deposits remain a large part of individual assets of Japanese people, and they should participate more actively in the stock market of their own country.

Shareholders' meetings in Japan have been undergoing changes. There have been an increasing number of requests and demands aimed at management from shareholders, and foreign investors are becoming much more aggressive. Most notable is the fact that the Pension Fund Association voted against 29% of the proposals put up by management. I think these trends are likely to continue over the next few years and I would see them as a positive development.

Next, the following question was taken from the floor:

I think the Japanese stock market depends excessively on buying by foreign investors, but may I ask if you have any suggestions on how to promote Japanese investor shareholdings?

Dr. SHEARD responded as follows:

One of the key ways to promote the flow of money into the equity market from Japanese investors is not to exhort them to buy equities but rather to change the deflationary macroeconomic environment. On a micro level, it is necessary to make it more attractive for Japanese households to hold risk assets by making it easier for them to invest in stocks, for instance by allowing them to buy shares in banks.

Next, the following questions were taken from the floor for Mr. KUSAKABE:

We understand that Japan did not introduce the mandatory bid system out of consideration for those who stage takeover attempts that are intended only for partial acquisitions, but the evidence to date appears to suggest that this resulted in attracting green-mailers for whom such a consideration is unnecessary.

As a practical issue, hostile takeovers designed to acquire only a little over 10% of outstanding shares are not successful in the end. It appears that those who make such takeover attempts tend to end up exiting after gaining various forms of benefit. Without the mandatory bid rule, it will become necessary for those confident of buying 100% of the shares of a company to prove their intentions in a court of law. But wouldn't this prove to be costly?

Mr. KUSAKABE responded to these questions as follows:

Opinion will be divided over the advantages and disadvantages of the mandatory bid rule. It should be pointed out that the system which recognizes partial acquisitions will make green mailers and coercive two-tier acquisitions easier. On the other hand, it appears that the mandatory bid rule is imposed uniformly on friendly and hostile takeover attempts. But various systems that make partial acquisitions possible do exist. There is perhaps an insufficient understanding concerning the establishment of rules on friendly or partial acquisitions.

There may be an argument over whether all buyout bids would be proper if they are made under the mandatory bid rule. There has been no consensus on two points regarding the mandatory bid rule: disadvantages of friendly partial takeovers and the possibility that initial offers do not necessarily reflect the corporate valuation of the companies involved.

Next, the following question was taken from the floor for Dr. SHEARD:

You mentioned that the corporate financing and governance reform processes are still only 40%-50% complete. What major items of reform do you see as outstanding at the moment?

Dr. SHEARD responded as follows:

Actually what I meant was not that there were a lot of additional institutional, deregulatory changes that need to be made, but rather I was referring to the evolution of the system. The corporate governance system is not just about rules and institutions but it is much more about the norms. The point I want to reiterate is that, in this very historic transformation of the Japanese system, from the old style system to a probably unique system with many elements of the Anglo-American system, we are still at a relatively early stage of that process.

In 10 years, 15 years or 20 years, you will have a very different ownership structure. Foreigners at present hold 23% or so of equities, but investment trusts hold only about 4% of the equity market, and pension funds and pension trusts again hold only 4% or 5%. Those numbers will be probably much bigger in 10 or 20 years. Therefore, the forces which are at work in the system will have to work in a dimension that will be quite different from that we see today, and corporate governance will also be different from the one we see today.

Next, the following question was taken from the floor:

Should average Japanese people resist or encourage the move toward a shareholder-oriented market in the future, or is it already an established fact and there is nothing we can do?

Professor GOERGEN responded to the question as follows:

A majority of academic studies agree that M&As are very good news for shareholders of a target company. They usually get very high premiums in M&A transactions. This is especially true in countries where block holders and minority shareholders are treated equally. But the bidding shareholders are break-even, at best, and could often realize significant negative returns. Regarding the role of M&As, we have been discussing long and hard whether we should facilitate this kind of operation.

Next, Mr. KUSAKABE responded as follows:

First, managers' awareness of issues has undergone considerable change over the past 10 years. It is symbolic that when the Nihon Keizai Shimbun asked institutional investors and Japanese managers during the takeover battle between Livedoor and Nippon Broadcasting System who they think owns companies, 100% of Japanese managers said shareholders do.

Next, shareholders' meetings will become considerably more active in the future. At many shareholders' meetings this year, Japanese institutional investors started speaking up on proposals that would prove effective in warding off takeover attempts.

When we look over the Japanese economic landscape as a whole, we see that the economy, overall, does not function unless we make the stock market more active and increase market capitalization. A channel which will make the stock market more active, raise shareholder values, and increase pension assets is extremely important as a means of resolving issues stemming from Japan's declining birthrate and aging population.

Taking all the things above into consideration, we expect that calls for a shareholder-oriented system will grow in the future. On the other hand, the role of stakeholders who are not shareholders yet committed to creating corporate values, such as transaction partners and employees, will be reviewed in the future.

Next, Mr. OKITSU responded as follows:

Managers all understand the importance of shareholders. But I am skeptical about the stance of shareholders who oppose everything that resembles an anti-takeover measure, as happened at recent shareholders' meetings, and who consider shareholders all-important. Therefore, we have to consider keeping them in balance with other stakeholders.