Post-COVID M&A developments in Japan

COVID-19 has been a scourge on the world economy, at one point slowing all social and commercial activity almost to a standstill. This article examines the M&A landscape in Japan since the outbreak of the global pandemic.
 
M&A activity since onset of pandemic
 
When the COVID-19 outbreak began in earnest in 2020, a period of low M&A activity was expected to set in. However, the crisis caused many Japanese companies to focus on their core businesses, and to divest business segments that they deem ancillary or that have been severely affected by the pandemic. Many companies, particularly in the manufacturing industry, were also motivated to part with their non-core businesses, both in efforts to achieve greater capital efficiency, and in response to recent corporate governance reforms. As a result, the number of divestitures of businesses and subsidiaries by listed companies in 2020 reached their highest volume in Japan since the Lehman crisis.
 
Acquisitions by overseas investors
 
Overseas investors have demonstrated increasing interest in, among others, large Japanese companies. Such deals include, for example, the SoftBank Group’s sale of Boston Dynamics, a wholly-owned U.S. subsidiary specialising in the development of high-performance robots, to Hyundai Motor Group for JPY 114 billion, Blackstone’s acquisition of Takeda Pharmaceutical’s Consumer Health Care Business Unit for JPY 242 billion, Bain Capital’s acquisition of a majority stake in Showa Aircraft from Mitsui E&S for approximately JPY 84.8 billion (inclusive of the payment of a special dividend), and Australian dairy company Vega Cheese’s acquisition of an Australian beverage subsidiary from Kirin Holdings Company, Limited for approximately JPY 40.9 billion. The SoftBank Group also announced its sale of British semiconductor designer ARM to NVIDIA for up to JPY 4.2 trillion, although the process has stalled as a result of antitrust concerns. More recently, in February 2021, CVC Capital Partners announced its acquisition of Shiseido’s daily necessities business unit for JPY 160 billion. [JD1] 
 
Hostile takeovers and shareholder activism
 
Hostile takeovers and shareholder activism have traditionally been rare in Japan.[1]However, overseas investors continue to place importance on the Japanese market because of its size and maturity, the quality of its technology, and its highly-educated workforce. In recent years, non-Japanese activists have increased their engagement with the Japanese market, seeing that many listed companies have the ability to achieve greater value through better governance. More generally, investors continue to see room for economic growth in Japan.
 
Based on proposals made at recent shareholder general meetings of Japanese companies, traditional concerns regarding capital policies, such as issues of shareholder return, have taken a back seat. Instead, there is now more emphasis on difficult and sophisticated questions regarding corporate governance and business operations, such as enhancement of board diversity and competence, improvement of management strategies, and leveraging of M&A to achieve corporate goals.
 
Hybrid virtual shareholder meetings
 
In parallel with the increased participation of overseas investors in the Japanese market, and in response to the needs of companies with widely-dispersed shareholders during the pandemic, there is also a shift toward global governance practices. In February 2020, for example, the Ministry of Economy, Trade and Industry (METI) introduced the “Hybrid Virtual Shareholder Meeting” concept to promote the globalisation of Japanese companies and the internationalisation of their shareholders.
 
Under this concept, shareholders are permitted to remotely participate in a general meeting (which will also be physically held, as required by the Companies Act of Japan, with directors present) without being physically present. Following METI’s publication of the “Guidelines on Approaches to Hybrid Virtual Shareholder Meetings Formulated,” some companies in Japan have begun holding “hybrid” shareholder meetings.
 
Further developments
 
Virtual-only meetings
 
To prevent the spread of COVID-19 in Japan, a bill to partially revise the Industrial Competitiveness Enhancement Act has been proposed. Under the proposal, directors, shareholders, and other stakeholders will be able to participate in shareholder meetings through web streaming and other means under the Companies Act. If the bill is passed, virtual-only shareholder meetings, which are currently not permitted, will become a reality for annual general meetings in 2021 (which are mostly held in June) in response to the current extenuating circumstances. In this regard, it is important to note the following:
 

1. only listed companies would be allowed to hold virtual-only shareholder meetings, and then only with authorisation from the Minister of Economy, Trade and Industry and the Minister of Justice[2];

2. no amendment to a company’s articles of incorporation is required for it to hold virtual-only meetings; and

3. the revised law will take effect approximately three years after the bill is passed, with subsequent measures to be considered depending on general economic and social conditions.

 
These developments have been welcomed, and could be followed by further regulatory and other changes in response to the trend toward globalisation.
 
Proxy advisory regulation
 
If the aforementioned trends lead to increased participation in the Japanese market by overseas investors, the use of proxy advisory firms by such shareholders to exercise their voting rights is expected to increase. Even though the proxy advisory market is generally regarded as an oligopolistic industry, and the influence of proxy advisory firms is on the rise, the accountability they bear for information accuracy in the development and application of voting standards, as well as their systems for managing conflicts of interest (such as the personnel and other systems at their Japan offices), has not been sufficiently clear. Regulations have been introduced in the U.S. to oversee proxy advisory firms, and similar discussions have been growing in Japan. This culminated in revisions to the Stewardship Code by the Financial Services Agency of Japan. Under the revisions, proxy advisory and other such firms are required to (a) develop a system for managing conflicts of interest, (b) develop human and organisational systems at their Japan offices, and (c) actively consult with relevant companies regarding the way they operate.

Shigeki Tatsuno has a thorough knowledge in M&A, Joint Venture and cross-border transactions. In addition, he regularly advises a number of venture companies and PE funds, and engages in general corporate matters, including IP transactions, broadly.