UFJの合併統合保護条項の米国法上の評価 （『国際商事法務』Vol.33, No.1掲載記事 )
(Published in "KOKUSAI SHOJI HOMU" Journal of the Japanese Institute of International Busines Law Vol. 33, No. 1 2005)
The recent activity surrounding the proposed merger between UFJ Holdings, Inc. ("UFJ") and Mitsubishi Tokyo Financial Group, Inc. ("MTFG"), and the competing bid for UFJ by Sumitomo Mitsui Financial Group, Inc. ("SMFG"), has attracted a great deal of attention from both the legal and business communities in Japan.
This interest is understandable. After years of observing, and occasionally participating in, corporate mergers in the United States and Europe, merger activity is now beginning to pick up in Japan. In addition, lawmakers are considering implementing changes that will allow foreign corporations to acquire domestic ones through the issuance of non-Japanese stock. Against this backdrop, obervers are anxious to understand how accepted US methods of addressing the risk of hostile transactions -- such as break up fees and poison pills -- may be adapted and applied in Japan, a nation that has long prided itself on operation by consensus. What will Japanese poison pills look like? How will Japanese shark repellants work? This interest in hostile mergers and defensive tactics has a practical aspect as well. Directors and managers want to understand the types of defensive measures that may become available, and indeed necessary, to retain appropriate control over their corporate future.
Because of the lack of takeover precedent in Japan, when considering M&A trends, many have turned to Delaware, the jurisdiction with the most fully-developed body of law and precedent regarding these transactions. Of course, applying Delaware laws to Japanese mergers is largely an academic exercise. The way deals are negotiated, the relationship among corporations, stockholders, directors and management, and -- most important ? the legal and regulatory framework in Japan, are all very different. However, until Japan develops its own body of law and precedent, observers may well consider corporate transactions from the benchmark of Delaware law, precedent and practice.
This article reviews the proposed merger of UFJ and MTFG, and the protective provisions implemented by MTFG in providing financing to UFJ, based on Delaware law. Our views differ from those expressed in several quarters, that these protective provisions would run afoul of Delaware precedent. We believe it is more likely that the MTFG financing would either not be subject to challenge under Delaware law, given the unique circumstances in which the transaction is occurring, or if challenged, would survive scrutiny by Delaware courts.
II. Factual Background1
The basic facts of the proposed UFJ and MTFG merger are well-known, but we review them briefly before considering how specific issues might be analyzed under Delaware law.
A. Basic Background and Events
UFJ is a holding company that, prior to the commencement of transaction discussions, held 100% of the shares of UFJ Bank, a company registered under the banking laws of Japan to conduct the primary banking business of UFJ, and which accounts for approximately 80% of UFJ's revenues. UFJ also holds 100% of the shares of UFJ Trust Bank Limited ("UFJ Trust"), as well as several other UFJ group entities.
In May 2004, UFJ Trust and Sumitomo Trust & Banking Co., Ltd. ("Sumitomo Trust") announced plans to integrate their operations. Then, on July 14, UFJ announced that it had cancelled these plans and intended to commence discussions with MTFG regarding a possible integration of UFJ and MTFG at the holding company level. In response, Sumitomo Trust filed a motion for preliminary injunction on July 16, essentially arguing that UFJ had an obligation, arising out of the proposed UFJ Trust/Sumitomo Trust transaction, to negotiate exclusively with Sumitomo Trust. The motion was granted by the Tokyo district court on July 27, but UFJ obtained a reversal of this ruling from the Tokyo High Court. The Tokyo High Court's decision was upheld by the Supreme Court of Japan on August 30.
While the parties litigated the issues raised in Sumitomo Trust's motion:
- On August 8, UFJ received a written merger proposal from SMFG.
- On August 12, UFJ and MTFG announced a basic agreement on plans to consolidate their operations, subject to approval by stockholders and regulatory authorities.
- On August 24, UFJ received a further merger proposal from SMFG in which SMFG specified a one-for-one exchange ratio, subject to due diligence.
- On September 10, UFJ announced the terms of a 700 billion yen capital injection by MTFG into UFJ Bank in exchange for the issuance of a new class of Series E Preferred stock of UFJ Bank (the "Series E Preferred").
- On September 17, the MTFG capital injection was completed.
Although there have been conflicting reports regarding how the UFJ board voted with respect to the Series E Preferred financing, UFJ President and CEO Ryosuke Tamakoshi indicated at the UFJ press conference announcing the financing that it was approved unanimously by the board.2 In an article in the October 22, 2004, evening edition of the Nikkei Shinbun, Mr. Shosaku Yasui, one of the three outside directors on the UFJ board, confirmed that he voted to approve the transaction.
B. Terms of the Series E Preferred
The Series E Preferred carries a dividend of 7% and generally has no voting rights. However, certain fundamental corporate actions of UFJ Bank require the affirmative class vote of the Series E Preferred, including any amendment of the bank's articles of incorporation, any merger or stock for stock exchange involving the bank's securities, and the appointment and removal of the bank's directors. In addition, MTFG is granted a put right with respect to all shares of Series E Preferred, and UFJ is granted a corresponding call right, at a price equal to 130% of the initial issuance price in the event that the proposal submitted by the board of directors of UFJ in connection with the business integration between MTFG and UFJ is not approved at the general meeting of UFJ's stockholders for the fiscal year ending March 31, 2005 and either 1) such merger proposal is submitted to a general meeting of UFJ's stockholders held on or after October 1, 2005, and such proposal is not approved at such meeting or 2) a proposal submitted by any person other than UFJ's board is approved at a general meeting of UFJ's stockholders held on or after October 1, 2005.3
The Series E Preferred is convertible into a separate series of UFJ Bank preferred stock (the "Series F Preferred") upon the fulfillment of certain triggering conditions. However, while the Series F Preferred is voting stock, and the shares received upon full conversion by MTFG would represent more than a one-third ownership interest (and would therefore constitute sufficient shares to block any proposed UFJ Bank merger under the Japanese commercial code), because the Series E Preferred already contains a class approval requirement for any merger, and because the Series F Preferred is subject to the same put/call rights as the Series E Preferred, a conversion of the Series E Preferred into Series F Preferred does not affect our assessment of how the financing would be viewed under Delaware law.
C. Series E Preferred Redemption Premium
The 30% premium that is payable on redemption of the Series E Preferred in the event of a put or call has attracted substantial attention. Although a number of commentators have characterized the premium as a "poison pill," from a formal standpoint this label is misleading. The term "poison pill," as typically used in a merger context, refers to special rights provided to a company's shareholders that are triggered by certain events, such as a substantial purchase of the company's stock. The primary purpose of the rights plan -- or "poison pill" -- is to trigger strong dilution in the event a hostile bidder seeks to gain control without board approval, and to thereby give the target's board greater leverage over, and a more complete opportunity to negotiate, acquisition terms.
In addition to being referred to as a "poison pill," the 30% premium has sometimes been referred to as a "breakup fee." Accordingly, consistent with the approach taken by most analysts, some commentators have sought to analyze the premium solely in terms of the percentage of transaction value it represents to see if the financing and premium would be enforceable under Delaware precedent regarding breakup fees.4 The problem with this approach is two fold. First, implicit in the 30% premium is a 7% dividend attributable to the Series E Preferred, and this requires some adjustment. Second, unlike a typical breakup fee, which involves a simple cash payment from a target to an acquiror in the event that a transaction fails to close, the premium here is associated with a financing transaction in which MTFG put significant capital at risk. Because UFJ Bank needed substantial new funds by the end of September to meet its capital requirements, and because there was likely no market for the required financing,5 it is nearly impossible to quantify the portion of the premium, if any, that represents a breakup fee, as opposed to compensation for MTFG's capital commitment.
III. Analysis Under Delaware Law
Having reviewed the key background facts of MTFG's capital injection, we now turn to the question of how this transaction proposal, and the board's actions in approving it, would be analyzed under Delaware law.
A. The business judgment rule
Any analysis of board action under Delaware law must begin with the business judgment rule and the deference that is ordinarily afforded to directors by Delaware courts. The rule was perhaps most succinctly stated in the 1984 case Aronson v. Lewis: "The business judgment rule is...a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company....Absent an abuse of discretion, that judgment will be respected by the courts."6 That is, absent specific circumstances, such as evidence of self-dealing by directors or the limited circumstances in which heightened duties or a heightened standard of review is applied, Delaware courts will refrain from substituting their own judgment for that of a corporation's board of directors.
B. Was the UFJ Board's approval process tainted by self-dealing?
The presumption of the business judgment rule can be rebutted if a plaintiff can show that members of the board had a material self-interest in the challenged transaction and that the self-interested directors controlled or dominated the board, or failed to disclose their interest in the transaction. 7
Here, however, there is no evidence that approval of the MTFG financing by UFJ's board was tainted by self-dealing, or that board members were not acting in the best interests of UFJ's stockholders in approving the financing. Neither the MTFG financing nor the merger proposal contained any terms which would have specifically advantaged the management or directors of UFJ through direct financial accommodations, assurances of post-merger job-security or otherwise. Indeed, as far as has been publicly reported, there were no material differences in the employment-related terms of the two merger proposals before UFJ's board. Given the lack of any evidence of a conflict of interest as well as the similarity of the two proposals before the board (in terms of their impact on the directors and officers of UFJ), the Delaware judiciary would likely defer to the decision by UFJ's board in approving the MTFG financing -- absent a heightened standard of review triggered by the circumstances of the transaction.
ext we consider whether, under Delaware law, such a heightened standard of review would be applicable, and, if so, whether the board's actions in approving the MTFG financing would meet that standard.
B. Was the UFJ Board subject to Revlon duties to maximize shareholder value?
First we consider whether UFJ's directors would have had a duty under Delaware law to seek the highest value for the shareholders in the context of the MTFG financing. Such a duty is often referred to as a board's "Revlon duty," based on the case in which it was first articulated, Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.8 Under Revlon, if a transaction will result in a change of control over, or an imminent break-up of, a company, the company's board has a duty to maximize the value received by stockholders.9
However, the scope of the transactions giving rise to Revlon duties is limited. Most relevant here is the case of Paramount Communications, Inc. v. Time, Inc.,10 in which the Delaware Supreme Court narrowed the scope of transactions giving rise to Revlon duties so as to exclude certain public-to-public mergers. Specifically, the court found that, for Revlon purposes, no "change of control" occurred where control, both before and after a transaction, resides not in any one controlling stockholder, but rather in a "fluid aggregation of unaffiliated stockholders representing a voting majority...."11 In other words, the court found that Revlon duties do not arise in a transaction such as this, where the shares of both the target (here UFJ) and the combined entity resulting from the transaction (here either the combined UFJ/MTFG or UFJ/SMFG entity) are publicly held, and no one stockholder emerges from the transaction with a clear voting majority. Thus, under Delaware law, Revlon duties would not apply to the UFJ board's review of the competing MTFG and SMFG proposals.
C. Was the UFJ board subject to heightened scrutiny under Unocal?
Although no Revlon duties apply, the actions of UFJ's board in approving the MTFG financing would be subject to heightened judicial scrutiny if characterized as defensive in nature. In the case of Unocal Corp. v. Mesa Petroleum Co.12 and cases which followed it,13 the Delaware supreme court found that when a board adopts defensive measures it bears the burden of demonstrating that it has "reasonable grounds to believe a danger to corporate policy and effectiveness existed," that such actions were not "coercive" or "preclusive," and that they were "reasonable in relation to the threat posed."14 Thus, the next question is whether the financing terms approved by UFJ constituted "defensive measures" giving raise to these Unocal duties and, if so, whether the board met the Unocal standard in approving these measures.
1. Was the MTFG financing a defensive measure under Unocal?
Until last year, many practitioners took the view that breakup fees and other components of consensual M&A transactions were not defensive in nature, but rather protective (that is, were not meant solely to defend, but also to protect, a negotiated transaction) and, therefore, did not trigger review under Unocal. However, in Omnicare, Inc. v. NCS Healthcare, Inc., a divided Delaware Supreme Court found last year that "defensive devices adopted by the board to protect the original merger transaction must withstand enhanced judicial scrutiny under the Unocal standard of review."15 As a result, while the Omicare ruling is still controversial, under present standards the approval of the Series E Preferred could, at least arguably, be subject to scrutiny under Unocal.
2. Assuming the MTFG financing was "defensive," would the Unocal standard be met?
If the MTFG financing is considered "defensive" for the purposes of Unocal, (1) the UFJ board must have reasonable grounds to believe that a threat to corporate policy and effectiveness existed, and (2) the measures in question must be a reasonable response to the threat and neither preclusive nor coercive. That is, there would have to be reasonable grounds for the board to perceive a threat to the company, and related measures that are neither preclusive nor coercive.
UFJ's board clearly perceived a threat from SMFG's competing bid. Specifically, the board expressed concern that the balance sheet resulting from a UFJ/SMFG combination would likely be substantially weaker than the balance sheet of a merged UFJ/MTFG entity.16 This concern was heightened by continuing regulatory pressure on Japan's major banks to address bad loans promptly (and to improve balance sheet strength as a pre-requisite to doing so), as well as by the fact that, if UFJ could not achieve a BIS capital ratio of at least 8% by the end of September (just a few weeks after the board meeting), it would have been forced to withdraw from overseas operations. Thus, in a highly regulated industry, and for a company in a crisis resulting from balance sheet issues, the relative balance sheet risk of an SMFG transaction would seem sufficient to satisfy the first prong of a Unocal analysis.
The second prong of Unocal is that the measures taken must not be "coercive" or "preclusive," and they must be "reasonable" in relation to the threat posed. Again, we believe that the measures approved by UFJ's board would meet these tests. As noted above, while there is a 30% premium associated with a redemption of the Series E Preferred, which would present an added cost for any third party who wished to pursue a transaction with UFJ by having it purchase the UFJ Bank shares pursuant to the call option, this premium must be considered in context. First, it must be adjusted to reflect the 7% dividend that would be foregone by MTFG in the event of redemption, thus reducing the premium. Second, and more important, the premium was ancillary to a financing of close to $7 billion, which was provided to a high-risk borrower.17 In these circumstances, it is not clear that there was any identifiable defensive component to the premium, or that the premium did not simply reflect market pricing for a high risk financing.
Even, assuming, however, that the none of the 30% premium reflects market pricing for the financing, the imputed "fee" likely falls within the range that has passed judicial review in the context of breakup fees. While it is difficult to translate the premium into a breakup fee, we believe that the imputed fee can be approximated as follows. First, start with the premium itself, which is 30% of 700 billion yen, or 210 billion yen. From this, subtract the amount represented by the 7% dividend. Under the preferred terms, a redemption of the Series E Preferred would only occur if the MTFG/UFJ merger did not proceed, or if UFJ's stockholders voted to proceed with an alternative deal after October, 2005. If one therefore selects twelve to eighteen months as the likely period prior to a redemption, the non-dividend portion of the premium is between 161 billion yen (after 12 months) and136.5 billion yen (after 18 months).
Next, a transaction value -- that is, the consideration offered to acquire the target -- must be established against which to measure the non-dividend portion of the premium. Although no clear transaction value has been proposed by MTFG, SMFG's competing bid provides a reference point, particularly given UFJ's view that "the merger ratio that can be obtained in the integration with MTFG is likely to be comparable to that proposed by SMFG." Thus, using the closing share prices of UFJ and SMFG on August 24, the day before SMFG announced its one-for-one exchange, one arrives at an estimated transaction value of 3.2 trillion yen. The 136.5 - 161 billion yen non-dividend portion of the premium, expressed as a percentage of the 3.2 trillion yen represented by SMFG's equivalent offer, represents an imputed "break-up fee" of between 4.3% and 5.0%.
While the Delaware courts have not fixed a "magic number" for breakup fees, that is, have not ruled on an acceptable, non-coercive, range for break-up fees under Delaware laws, US practitioners generally consider fees in the range of one to five percent range to be reasonable. In Kysor Indus. Corp. v. Margaux, Inc., a Delaware superior court acknowledged such a range by stating that "[c]ommentators have expressed the view that liquidated damage provisions in the one-to-five percent range of the proposed acquisition price are within a reasonable range."18 And an upper limit was perhaps suggested in dictum in a footnote in Phelps Dodge Corp. v McAllister, where the Delaware Chancery Court characterized a breakup fee of 6.3% as one that "stretched the definition of range of reasonableness and probably stretches the definition beyond its breaking point."19 Thus, even assuming that the entire redemption premium constitutes a defensive "breakup fee," it falls within the range of fees commonly negotiated in a merger context.
2. Do the voting rights of the Series E Preferred raise additional issues?
A second element of the Series E Preferred that might be viewed as defensive is the class voting rights giving Series E Preferred shareholders an approval right over certain corporate actions of UFJ Bank, as well as the general voting rights available upon conversion of Series E Preferred into Series F Preferred.
Once again we are presented with the threshold question of whether the voting rights are defensive in nature, as opposed to being merely protective, given the fact that they were adopted in a friendly merger context. Further, unlike the put/call rights and related premium, the voting rights at issue here are commonly provided to investors in preferred shares in the United States. That is, even without a competing bid, it would be highly unusual for a US investor to make a substantial equity investment in a troubled company without protective voting rights such as those provided to MTFG here.
Given the circumstances of the financing, and the nature of the voting rights at issue, we believe it is difficult to view the voting terms as defensive for Unocal purposes. However, even if the voting rights are considered defensive, they would likely meet the Unocal standard for the reasons set out above. The first prong of Unocal would again be satisfied by the balance sheet concerns expressed by the UFJ board. As for the second prong, the voting rights do not preclude an alternate transaction, nor do they coerce UFJ voters to approve a combination with MTFG. Rather, they merely delay a competing bid. Specifically, once certain conditions are satisfied, beginning in October, 2005, the call/put terms of the Series E Preferred would be triggered and UFJ would have the ability under the call, or potentially the obligation under the put, to redeem the Series E Preferred, eliminating the class voting rights of Series E holders. Delaying measures -- such as, for instance, the implementation of a staggered board -- have long been considered appropriate defensive measures under Delaware law, and neither preclusive or coercive. In addition, under Section 203 of the Delaware General Corporation Law, a three year delay of a business combination with an interested stockholder is mandated unless certain conditions are met. It therefore seems doubtful that the Delaware courts would view a one year period of delay as preclusive, coercive or otherwise contrary to public policy.
3. Would there be interference with voting rights under Blasius?
A final issues is whether the issuance of the Series E Preferred could be challenged as an interference with the voting rights of UFJ's shareholders. Under a line of Delaware cases beginning with Blasius Industries, Inc. v. Atlas Corp.,20 Delaware courts have established an even higher standard of review than Unocal where a board is accused of taking action designed primarily for the purpose of interfering with ability of stockholders to vote for the election of directors. Although a Delaware court would not normally apply Blasius where no election contest for directors is involved,21 one could argue under the Blasius line of cases that the issuance of the Series E Preferred intentionally interfered with the voting rights of UFJ's stockholders. If a plaintiff were successful in invoking a review under Blasius, the UFJ board would need to show a compelling justification for its actions.
However, it is unclear whether MTFG's voting rights actually interfere with the voting rights of UFJ's stockholders. First, MTFG's voting rights are with respect to UFJ Bank, UFJ's bank subsidiary, and do not directly affect the voting rights of stockholders of UFJ. Second, although older Delaware cases provided relief under Blasius where stock was issued to change voting control,22 the Delaware courts have not applied a Blasius analysis to preferred stock issuances, such as that present here. Indeed, in Shamrock Holdings, Inc. v. Polaroid Corp.,23 the court refused to apply Blasius to the issuance of preferred stock, concluding that the primary purpose of the issuance was not to interfere with a shareholder vote.
Even if a Blasius analysis were triggered, as mentioned previously, UFJ's board would have the burden of demonstrating that its actions had a "compelling justification." Although this is a higher burden than the Unocal standard, it is likely that this higher standard could be met. As has already been mentioned, UFJ faced a very real risk of failing to meet its capital requirements as of the end of September, 2004. The damage to UFJ's shareholders if it failed to meet these requirements would have been significant. In this context, UFJ's decision to accept MTFG's capital, including the provisions intended to protect the value of its investment, could be justified by the compelling justification that without it, UFJ's stockholders stood to lose a significantly greater amount of value than they might in the event that UFJ is forced to pay a premium for the use of MTFG's capital.
In conclusion, the MTFG financing is neither a "poison pill" nor a "breakup fee." Rather it is a financing coupled with terms that both protect MTFG's investment and provide MTFG with advantages as a bidder for UFJ.
Under the traditional standards of Delaware law, a financing along these lines -- agreed to in the context of a friendly merger negotiation -- would not be subject to heightened review. However, even assuming that today -- under last year's Omnicare ruling ? the MTFG financing would trigger heightened scrutiny, it would likely pass that review. First, the UFJ board clearly had reasonable concerns about SMFG's proposal, based on SMFG's weaker balance sheet and the substantial financial support it was receiving from the government. Second, the measures adopted in response to this concern were reasonable and neither precluded UFJ's shareholders from considering a superior proposal, nor coerced them to approve an MTFG deal. At most, these measures imposed a fee, within the range of the breakup fees typically negotiated in the United States, applicable for a one year period. In return, the UFJ board obtained close to $7 billion in equity financing, in order to meet an immediate, and non-negotiable capital requirement.
Given the overall circumstances of the MTFG financing, based on the information currently available, it appears likely that the actions of UFJ's board in approving the MTFG financing met the requirements of Delaware corporate law.
- All information has been drawn from public sources, including the press releases of the parties.
- TOB ni Sonae Kyootei - UFJ, Mitsubishi Togo he Zenshin - Mitsui Sumitomo to "Ketsubetsu", Chonichi Shinbun Morning Edition, September 11, 2004, at 10.
- There are also additional triggering events for the put and call rights that are not implicated by our analysis.
- See Stephen Givens, Delaware-shu Saikosai de Attara, Konkai UFJ Holdings-gawa ga Totta Gappeitogoboshisaku ni Taishite, Dono Yo na Shihohandan wo Kudashita de Aro ka? [How Would the Delaware Courts Rule Regarding the Defensive Measures Taken by UFJ?], 32 KOKUSAI SHoJI HoMU 1295, 1315 (2004).
- The only plausible benchmark for alternative financing that we are aware of is SMFG's proposal, but this proposal had different terms, and UFJ's management indicated that they did not view the proposal as viable given conditions on the proposal and the need for regulatory approvals that might not be available by September 30, 2004.
- Aronson v. Lewis, 473 A.2d 805, 812 (Del., 1984).
- Cede & Co. v. Technicolor, 634 A.2d 345, 363-64 (Del., 1993).
- 506 A.2d 173 (Del., 1986).
- Id. at 182.
- 571 A.2d 1140 (Del., 1989).
- Id. at 1150; See also Arnold v. Society for Sav. Bancorp, 650 A.2d 1270, 1290 (Del., 1994).
- 493 A.2d 946 (Del., 1985).
- See, e.g., Unitrin, Inc. v. American Gen. Corp. (In re Unitrin, Inc.), 651 A.2d 1361 (Del., 1995).
- 493 A.2d at 955.
- 818 A.2d 914, 931 (Del., 2003).
- Specifically, as indicated by UFJ in its press release on September 10 (under the title "Capital Injection from Mitsubishi Tokyo Financial Group"), board members expressed concerns about the higher level of government funding, non-performing loans and deferred tax assets of a combined UFJ/SMFG entity.
- Prior to the commencement of discussions with MTFG, Moody's "Bank Financial Strength Rating," which focus on a bank's stand-alone financial strength, for both UFJ Bank and UFJ Trust were "E," the lowest rating.
- 674 A.2d 889, 897 (Del. Super. Ct., 1996).
- 1999 Del. Ch. LEXIS 202, at *5 (Del. Ch., 1999).
- 564 A.2d 651 (Del. Ch., 1988).
- In re MONY Group Inc. S'Holder Litig., 853 A.2d 661 (Del. Ch., 2004).
- Condec Corp. v. Lunkenheimer Co., 43 Del. Ch. 353 (Del. Ch, 1967).
- 559 A.2d 278 (Del. Ch., 1989).