Takeover Bid Regulations in M&A

Regulations governing takeover bids

In principle, anyone is free to buy and sell shares listed on a financial instruments exchange. In addition, the method of trading shares is not mandatory to trade within the market, so it is possible to buy and sell listed shares outside the market by agreement between the seller and the buyer. However, when certain shareholders purchase a large number of shares with the aim of acquiring management control of a listed company, without any legal restrictions, ordinary shareholders would have to negotiate individually with the purchaser regarding the purchase price and terms of sale, and some shareholders would be able to sell at a higher price while others would be forced to sell at a lower price. This can lead to inequity among shareholders, as some shareholders are forced to sell at a higher price while others are forced to sell at a lower price. In addition, ordinary shareholders do not have sufficient information about the issuing company and cannot judge whether the terms and conditions offered by the tender offeror are appropriate or not. Furthermore, if a takeover bidder buys up a large number of shares, the public shareholders may permanently lose the opportunity to sell their shares if the company goes private in the future. Thus, when certain shareholders buy up shares in order to gain control of the company, a small number of shareholders may find themselves in an extremely precarious position. In addition, there is a possibility of inequality among shareholders. In order to eliminate such inequalities and treat all shareholders equally, the Financial Instruments and Exchange Law’s tender offer regulations are designed to enhance information disclosure by acquirers and to give all shareholders an equal opportunity to sell their shares on the same terms and conditions. A tender offer is also called a TOB, an acronym for Take Over Bid.

When a tender offer is mandatory

In which cases a takeover bid is mandatory is stipulated in Article 27-2, Paragraph 1 of the Financial Instruments and Exchange Law. We will confirm each of them below.

5% Standard

In the case of an off-exchange stock purchase, if the shareholding ratio of the purchaser after the purchase exceeds 5%, the purchase must be made by tender offer (Article 27-2, Paragraph 1, Item 1 of the Financial Instruments and Exchange Law). However, for purchases from a significantly smaller number of persons (if the total number of counterparties acquired off-market during the preceding 60 days is 10 or less), shares may be acquired without a tender offer as an exception to the 5% standard. Ultimately, when shares are purchased off-market from an unspecified number of persons, the 5% standard applies, and a tender offer is enforced at the stage where more than 5% of the shares are purchased.

One-third Criterion

Even in the case of an off-exchange purchase of shares from a very small number of persons (the total of the number of persons from whom the purchase is made and the number of persons from whom the purchase was made off-exchange during the 60 days preceding the date of purchase is 10 or less), if the purchaser’s shareholding ratio after the purchase exceeds 1/3 of the total number of shares issued and outstanding, the tender offer will be enforced at the point where the purchaser’s shareholding ratio after the purchase exceeds 1/3 of the total number of shares issued and outstanding. (Article 27-2, Paragraph 1, Item 2 of the Financial Instruments and Exchange Law). Even if the purchase is made by a significant minority, if the purchaser’s shareholding ratio exceeds one-third of the total number of outstanding shares, a tender offer must be made in order to give all shareholders the opportunity to sell their shares.

ToSTNeT Transactions

Even in the case of a purchase of share certificates, etc. within an exchange market, a so-called “specified transaction” such as off-auction trading on the Tokyo Stock Exchange (ToSTNeT Tostnet trading), if the shareholding ratio after such purchase, etc. exceeds one-third of the total number of outstanding shares, a tender offer must be used. Although so-called “specified transactions” such as ToSTNeT transactions are considered to be intra-exchange transactions, they are substantially similar to off-exchange transactions. Therefore, in order to prevent circumvention of the tender offer regulations, if the shareholding ratio after the purchase exceeds one-third through ToSTNet transactions, the purchase must be made through a tender offer.

Rapid Takeover Bids

A tender offer must be made as a “rapid purchase” or “speed regulation” if the following requirements are met (Article 27-2, Paragraph 1, Item 4 of the Financial Instruments and Exchange Law)

1. within 3 months (Article 7, Paragraph 2 of the Financial Instruments and Exchange Law Enforcement Order)
2. in excess of 10% of the total number of shares issued and outstanding (Article 7, Paragraph 3 of the Financial Instruments and Exchange Law Enforcement Order)
3. in the event that the Company acquires shares by purchase or by issuing new shares, and
4. where the resulting shareholding ratio exceeds one-third (Article 7, Paragraph 2 of the Enforcement Order for the Financial Instruments and Exchange Law)
5. however, shares exceeding 5% of the total number of issued shares are acquired neither in the market nor through a tender offer (Article 7, Paragraph 4 of the Financial Instruments and Exchange Law Enforcement Order).

The above requirements are very confusing. The first requirement is to acquire 10% or more of the outstanding shares within 3 months. The second requirement is that of the 10% or more of the shares acquired under the first requirement, more than 5% of the shares must have been acquired through “a method that is neither in the market nor a tender offer” (i.e., a negotiated transaction or specific transaction). Finally, the third requirement is that the shareholding ratio after the acquisition must exceed one-third.
This provision is designed to prevent companies from attempting to circumvent the tender offer regulations by acquiring less than one-third of the shares off-market and then increasing their shares through market transactions so that their shareholding ratio exceeds one-third. By applying the tender offer system to such “rapid purchases,” the rule seeks to prevent circumvention of the one-third rule.
The “rapid takeover” rule regulates acquisitions of more than 10% of a company’s stock within a three-month period. If a company does not acquire more than 10% of the shares but still exceeds one-third, it means that it originally acquired more than 23% of the shares, and the large shareholding report reveals its shareholding. If the company acquires less than 10% of the shares within three months, it is clear that it is already a large shareholder and there is no need to force a tender offer, as it will not be a surprise acquisition.
In order to qualify as a “rapid acquisition,” more than 5% of the shares must have been acquired through a negotiated transaction or a specified sale or purchase. Therefore, if less than 5% of a company’s shares are acquired through negotiated transactions or specified sales, etc., and the remaining shares are acquired through intra-market transactions or tender offers, the tender offer regulations do not apply.
On the other hand, if, within the past three months, the company has acquired more than 10% of its shares, 5% of which were acquired off-market, and the company subsequently acquired more than one-third of its shares through in-market transactions, the result is that a tender offer was required for all purchases. Thus, it follows that the acquisition of 5% of the shares made off-market would be retroactively illegal.

Counter Offer

A takeover bid must be made in the following cases (Article 27-2, Paragraph 1, Item 5 of the Financial Instruments and Exchange Law)

1. Where a tender offer is currently being made
2. Where a person other than the issuer of the share certificates, etc. (limited to a person whose shareholding ratio exceeds one-third)
3. during the period of the current tender offer (Article 7, Paragraph 5 of the Financial Instruments and Exchange Law Enforcement Order)
4. intends to acquire more than 5% of the shares (Article 7, Paragraph 6 of the Financial Instruments and Exchange Law Enforcement Order)

If a takeover bid is being made by a third party while there is already a party holding more than one-third of the shares, it can be said that this is a case where a dispute over control arises. Under such circumstances, it is unfair to require one party to make a takeover bid while the other party is free to acquire shares in and outside the market. Therefore, the purpose of this provision is to prohibit the other party, even if it currently owns more than one-third of the company, from making any purchase other than by tender offer during the period of the tender offer by the other party.

Public Notice of Commencement of Tender Offer

A tender offeror is required to give public notice of the name, address and location of the tender offeror, the purpose of the tender offer, the purchase price, the number of shares to be purchased, and the period of the purchase (Article 27-3, Paragraph 1 of the Financial Instruments and Exchange Law, Article 10 of the Tender Offer Ordinance). Public notice shall be given either by electronic public notice through EDINET or by publication in a daily newspaper (Article 9-3, Paragraph 1 of the Financial Instruments and Exchange Law Enforcement Order).

Submission of Tender Offer Registration Statement

On the date of the public notice of the commencement of the Tender Offer, the Tender Offeror shall submit a Tender Offer Registration Statement to the Director-General of the Kanto Local Finance Bureau, stating the price of the purchase, the number of shares to be purchased, the period of the purchase, delivery and other settlement matters relating to the purchase, and the conditions attached to the purchase by the Tender Offeror (Financial Instruments and Exchange Act Article 27-3, Paragraph 2 (Article 27-3, Paragraph 2 of the Financial Instruments and Exchange Act). In addition, the Offeror is required to send a copy of the Tender Offer Registration Statement with certain attachments to the issuing company and the financial instruments exchange on which the shares of the issuing company are listed (Article 27-3, Paragraph 4 of the Financial Instruments and Exchange Law; Article 13, Paragraph 1 of the Tender Offer Regulations).

Statement of Opinion by the Target Company

The issuer of share certificates, etc. (the Target Company) involved in the Tender Offer is required to submit a report expressing its opinion on the Tender Offer within 10 business days from the date of the public notice of the commencement of the Tender Offer (Article 27-10, Paragraph 1 of the Financial Instruments and Exchange Act; Article 13-2 of the Enforcement Order of the Financial Instruments and Exchange Act).
In addition to the opinion regarding the tender offer, the statement of opinion may also include questions to the tender offeror and a request for an extension of the purchase period (Article 27-10, Paragraph 2 of the Financial Instruments and Exchange Law).
If the statement of opinion includes questions to the Offeror, the Offeror shall submit answers to the questions to the Prime Minister (Director-General of the Kanto Local Finance Bureau) within five business days of receiving a copy of the statement of opinion (Article 27-10, Paragraph 11 of the Financial Instruments and Exchange Act; Article 13-2, Paragraph 2 of the Financial Instruments and Exchange Act Enforcement Order), A copy of the answers must be sent to the issuer of the share certificates, etc. (the Target Company) and the financial instruments exchange in connection with the Tender Offer (Article 27-10, Paragraph 13 of the Financial Instruments and Exchange Law).
It is expected that the exchange of such questions and answers will clarify the attitude of the issuer of share certificates, etc. (the Target Company) toward the relevant tender offer and provide the general shareholders with information on how to decide whether to accept the relevant tender offer.

Regulations Concerning Tender Offers

Prohibition of Purchases other than Tender Offer

During the Tender Offer Period, a Tender Offeror may not purchase any share certificates, etc. that are the subject of the Tender Offer other than through the Tender Offer (Article 27-5 of the Financial Instruments and Exchange Law).

Prohibition of Alteration of Conditions, etc. of the Tender Offer

The Tender Offeror may not reduce the purchase price, decrease the number of shares to be purchased, shorten the period, or otherwise change the terms of the Tender Offer to the disadvantage of investors (Article 27-6, Paragraph 1 of the Financial Instruments and Exchange Law). The reason why changing the conditions of the purchase during the Tender Offer period is prohibited is that if the conditions of the purchase are changed during the Tender Offer period to the disadvantage of general shareholders, it could result in a wild fluctuation in the share price and become a breeding ground for market manipulation.

Preparation and Delivery of Tender Offer Explanatory Statement

A tender offeror must prepare a tender offer explanatory statement that contains the matters described in the tender offer notification and deliver the tender offer explanatory statement to a person who intends to sell shares (Article 27-9 of the Financial Instruments and Exchange Law). This will result in direct disclosure of information to the tendering parties.

Prohibition of Withdrawal of Tender Offer

In principle, a tender offeror may not withdraw a tender offer after giving public notice of the commencement of the tender offer (the main clause of Article 27-11, Paragraph 1 of the Financial Instruments and Exchange Law). In contrast, a shareholder who has tendered shares in a tender offer may cancel the relevant tender offer agreement (agreement to sell shares) at any time during the tender offer period.

Period of the Tender Offer

The period of the Tender Offer will be determined by the Offeror between 20 business days and 60 business days (Article 27-2, Paragraph 2 of the Financial Instruments and Exchange Law and Article 8, Paragraph 1 of the Financial Instruments and Exchange Law Enforcement Order). However, if the Tender Offer Period is less than 30 business days, the Target Company may apply for an extension of the Tender Offer Period in the Opinion Report (Article 27-10, Paragraph 2 of the Financial Instruments and Exchange Act; Article 9-3, Paragraph 6 of the Financial Instruments and Exchange Act Enforcement Order), in which case the Tender Offeror must extend the Tender Offer Period to 30 business days (Financial Instruments Article 27-10, Paragraph 3 of the Financial Instruments and Exchange Law and Article 9-3, Paragraph 6 of the Financial Instruments and Exchange Law Enforcement Order). During the tender offer period, ordinary shareholders will decide whether or not they should accept the tender offer.

Settlement of Stock Purchase

After the end of the tender offer period, the Offeror will send a notice of acquisition of shares to the tendering shareholders,
settlement without delay (Article 27-2, Paragraph 5 of the Financial Instruments and Exchange Law and Article 8, Paragraph 5, Items 1 and 2 of the Financial Instruments and Exchange Law Enforcement Order).

Conditions of the Tender Offer

The Tender Offeror may set the following conditions in the Public Notice of Commencement of Tender Offer and the Tender Offer Registration Statement

1. If the total number of tendered share certificates, etc. is less than the number stated in the Public Notice of Commencement of Tender Offer and the Tender Offer Registration Statement in advance as the number of share certificates, etc. to be purchased in whole or in part, the Tender Offeror will not purchase all of the tendered share certificates, etc. (Article 27-13, Paragraph 4, Item 1 of the Financial Instruments and Exchange Law).
2. if the total number of tendered share certificates, etc. exceeds the number of share certificates, etc. to be purchased, not to purchase all or part of the excess portion (Article 27-13, Paragraph 4, Item 2 of the Financial Instruments and Exchange Law). If partial purchase is made, the shares will be purchased from the tendering shareholders on a pro rata basis (Article 27-13, Paragraph 5 of the Financial Instruments and Exchange Law).

Termination of the Tender Offer

On the day following the last day of the Tender Offer Period, the Offeror must publicly announce and publish the results of the Tender Offer (Article 27-13, Paragraph 1 of the Financial Instruments and Exchange Law). Furthermore, the Offeror must submit a tender offer report to the Prime Minister (Director-General of the Kanto Local Finance Bureau) (Article 27-13, Paragraph 2 of the Financial Instruments and Exchange Law). In addition, the Tender Offeror is required to send a notice of purchase, etc. to the tendering shareholders, etc.