Japan’s latest M&A proposals could inflate take-private costs

Revisions to a proposed regulatory change concerning Japanese take privates could raise the prices of such transactions.

The Tokyo Stock Exchange last week launched a consultation process on proposed amendments regarding management buyout and subsidiary conversions with a view to safeguarding minority shareholder rights. The paper will receive public comment until 14 May before it is finalised and implemented in July.

The latest proposals include requiring the target companies to disclose share value calculation details and consult a “special independent committee” to determine the appropriateness of the transaction. This would comprise external directors, company auditors and experts with no interest with the controlling shareholder to draft an “opinion” explaining the fairness of the terms of the transaction and its procedures.

Currently, a listed company that is planning to go private and convert into a wholly-owned subsidiary is required to obtain an “opinion stating that the transaction is fair to general shareholders” from entities with no interest in the controlling shareholder. TSE’s latest proposal expands this requirement to management buyouts and transactions involving significant minority shareholders – such as those with a 20 percent stake.

The existing rules only require cases where the buyer is already a controlling shareholder to disclose details of the transaction, including value calculations and the provision of a fair opinion. Should the proposal be implemented, the requirements will also apply to buyers who are affiliates with a minority stake, or an incumbent management member.

According to Japan-based partner Michihiro Nishi at Clifford Chance, the incoming rules can mean a potential rise in acquisition premiums. “Higher premiums could be seen going forward to indicate that the deal terms are fair, since price is a critical factor in these transactions,” he told Private Equity International.

One founding partner at a Tokyo-based buyout firm, speaking on condition of anonymity, said the new requirements may place a heightened burden on buying GPs in the short term. “From a buyout fund perspective, at first glance, heightened fairness requirements could lead to rise in acquisition premiums. We also anticipate increased transaction costs and procedural complexity due to the added compliance burden.”

Upholding fairness and transparency

The proposals come amid growing enthusiasm about Japan’s burgeoning take-private opportunity and aim to address concerns about minority shareholder protection.

“A key aspect of these amendments is the requirement for the target public company to obtain an opinion from an independent special committee, affirming that the transaction is fair to general shareholders,” said Nishi. “This measure ensures that any increase in corporate value is equitably distributed among all shareholders.” The independent special committee must also take into account the expected synergies of the acquisition and whether gains are fairly allocated to all shareholders.

The proposed updates also require the target company to disclose the rationale behind financial forecasts and its methodology for calculating terminal value to keep calculations transparent.

“In a discounted cashflow analysis, the target company must now provide detailed explanations of the business’s future plans, expectations post-acquisition and the discount rates used,” said Nishi, adding that the proposed rules require the fee structure of third-party valuation advisers to be disclosed, with contingent fees expected to be viewed negatively from a fairness perspective.

The Tokyo Stock Exchange updated standards for listed companies in 2023, pushing them to improve their price-to-book ratio and strengthen their governance. As a result, more public companies are getting de-listed. The market saw 87 IPOs and 97 de-listings last year, marking the first time the number of publicly listed companies reduced, Kazuhiro Yamada, co-head of Carlyle Japan, told PEI in April.

As PEI explored in this month’s Japan Report, the take-private segment has also become something of a heated battleground, with KKR and Bain Capital recently tussling for software integration business Fuji Soft. KKR won the day with a $4 billion offer. Bain, meanwhile, reached an agreement with aircraft cabin equipment maker Jamco to take the business private in a $634 million transaction in January.

Deloitte Japan believes the amendments are timely given strong interest from global investors in Japanese take-private opportunities.

“In practice, most rules and procedures are already established so we do not anticipate significant confusion,” said head of corporate financial advisory Akihiro Kataoka. “As for additional measures, such as improving the transparency of calculation assumptions, we expect some feedback from stakeholders. Nevertheless, we consider these enhancements crucial for establishing better market practices that benefit general shareholders.”

One potential drawback, however, is that these proposed amendments may influence how Japanese courts review take-private cases and potentially increase litigation risk if transactions don’t uphold minority shareholder rights. That said, should the revised regulations come into effect in July, Nishi does not expect them to dampen investor enthusiasm.

“Instead, they bolster the credibility of the Japanese stock market, instilling greater confidence among foreign investors,” he added. “By mandating fair processes and valuations, these amendments are poised to promote investment in Japan.”