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Draft Guidelines for Corporate Takeovers

Letter to Japan’s Ministry of Economy, Trade and Industry, 3 August 2023.

We refer to the invitation for public comments issued by Japan’s Ministry of Economy, Trade and Industry (METI) on the Draft Guidelines for Corporate Takeovers on 8 June 2023. We appreciate the opportunity to provide our feedback to the guidelines.

Norges Bank Investment Management (NBIM) is the investment management division of the Norwegian Central Bank and is responsible for investing the Norwegian Government Pension Fund Global. NBIM is a globally diversified investment manager with ¥176,770 billion at year end 2022, 8,479 billion of which invested in the shares of Japanese companies. As a long-term investor, we support well-functioning financial markets that facilitate the efficient allocation of capital and promote long-term economic growth.

We welcome METI’s work to encourage acquisitions that result in a healthy M&A market, and to improve predictability both for parties involved in acquisitions and broader capital market participants. The guidelines can facilitate best practices in the Japanese market, and improve transparency and fairness for the parties involved as well as minority shareholders. We appreciate in particular METI’s intention to seek feedback from global investors.

We find the definition of “corporate value” underpinning the Board’s assessment of an acquisition offer somewhat unclear. In particular, we query why the wording of the guidelines implies that corporate value and shareholders’ interests can be in contrast with each other, as we believe that shareholders’ interests are aligned with maximisation of corporate value. Furthermore, we note that there is no transparency obligation on the Board’s assessment of corporate value, which can encompass a subjective judgment (e.g. on the factor used to discount the company’s future cash flows) and should be disclosed to shareholders to facilitate accountability. An acquisition offer could under the guidelines be rejected on the sole basis of the Board’s assessment of corporate value, with no transparency on this assessment and no possibility for shareholders to hold the Board to account. This is key as directors’ incentives are not always aligned with those of shareholders. 

Importantly, we believe that acquisition offers should only be submitted to independent directors, meaning those directors who are independent from both the parties involved in the acquisition and the success or failure of such acquisition (i.e. not having any material interest that differs from the shareholders). This would reflect common market practice and avoid conflicts of interests driving the perception of the entire Board. Relatedly, we believe that the establishment of a special committee of such independent board members would not be too burdensome and should be required in all cases.

Regarding takeover response policies, we believe that they should be subject to mandatory shareholders’ approval in line with market practice. This approval, as expressed through a vote held at either an annual general meeting or an extraordinary meeting, should be required both for the company to adopt a takeover response policy in “normal times”, and for the company to apply a countermeasure under the adopted policy in “emergent phase” – i.e. to react to a specific hostile takeover bid. In other words, shareholders’ support should be expressed twice, first on the general establishment of such a policy, and second for its concrete implementation. It is important that such a shareholder vote requires a majority vote of minority shareholders, to avoid any conflict of interest of controlling shareholders driving the result of this vote. More broadly, minority shareholders’ interest would be better protected if the guidelines included a requirement for “majority of minority” shareholders vote to approve an acquisition offer.

While this is not directly addressed in the draft guidelines, we also suggest METI considers establishing an enforcement mechanism for the guidelines, such as an independent arbiter for takeovers. A takeover panel or similar organisation can prevent corporate actions from proceeding in cases where regulations are not being adhered too, and such organisations have legal powers to ensure compliance. We welcome the consideration of other jurisdictions’ legal systems and practices by the “Fair Acquisition Study Group”, however we regret that the material provided in English does not include such a comparative overview of other major regulated markets. We would appreciate the opportunity to see an English translation of all the documents and inputs considered by the Group.

We thank you for considering our perspective and remain at your disposal should you wish to discuss these matters further.

Yours sincerely,

Carine Smith Ihenacho                
Chief Governance and Compliance Officer        

Elisa Cencig
Senior ESG Policy Adviser

Download the letter (pdf)