Corporate Governance of Japanese companies: shareholders & their interests

1. Corporate Governance of Japanese companies: shareholders & their interests Souichirou Kozuka Professor of Law Sophia University

2. Key to understanding Japanese corporate law • Simple (simplistic) “shareholder centrism” • Manager should be loyal to shareholder interest (Agency theory) • Difficulty in identifying “shareholder interests” (collective action problem) is not recognised.

3. Bulldog sauce case • TOB by Steel Partners (US fund) • Issuance of share options • Discriminatory against acquirer • Approval by Shareholders

5. Bulldog sauce SC decision • SC (Aug. 2007) upheld the defensive measure employed by management • Held not to be infringing “equality among shareholders” • Reason: (super-)majority supported the management in finding the acquirer to be against common interests of shareholders

6. 2005 METI Guidelines on introducing defensive measures • Protection of shareholder interests • To be based on the shareholders’ consent • Proportionality

7. 2008 METI Guidelines on activating defensive measures • Defence just to delay the takeover (eg AWS-type measures): permitted. • Defence against apparently abusive takeover: permitted. • Defence on finding that the takeover damages the shareholders’ interests: must be based on shareholders’ consent.

8. Liability of directors: law reform • Shareholder’s derivative suit awakened in 1993 (by a tiny procedural amendment, to filing fees) • Industry reacted strongly • Partial exemption introduced in 2001 • Limitation agreement only available to outside directors

9. Liability of directors: courts’ response • Courts deciding according to shareholder (not stakeholder) theory. • Japanese version of BJR: directors must not be negligent in investigations and the decision made must not manifestly unreasonable. • Many ex-directors of failed banks held liable since ‘00 (incl. SC on Takugin).

10. Changes in capital markets • Shares increasingly held by nominees: • increase of institutional investors/foreign investors • Banks disappearing as major shareholders: • cross shareholding under the main bank system evaporated?

11. Changes in corporate governance • Pressure from institutional investors (incl. foreign investors) • Hostile takeovers • Proxy fight (Moritex case, Tokyo DC 2007) • Shareholder proposals (successful in Aderans in 2008)

12. Reforms in 1990’s • 1990’s as an era of reform – in corporate law as well • Frequent amendments (almost every year, sometimes multiple) • Bills sometimes submitted by MPs (since 1997) • Culminated in Corporations Act 2005

13. Major reforms • Corporate finance – impact of finance theory (e.g. stock repurchase) • Deregulation – minimum capital requirement abandoned, freedom in articles of association enlarged etc • Corporate governance – global competitiveness? • Corporate restructuring

14. Corporate restructuring • Establishment of holding companies: financial conglomerates; distribution companies; manufacturers; broadcasting companies. • Lifting the ban in AMA in 1997. • Reform of merger law, introduction of demerger (spin-off), share-for-share exchange, share-transfer.

15. Looking back • Some people claim that the reform was all in the interest of “industry.” • Interests of employees are said to be left behind. • Developments in practice/case law must also be looked at. • The key is (too much) emphasis on shareholder interests.