Expanded Disclosures to Shareholders and Investors in Tender Offers
By Daisuke Niwa
As the second installment in a series by Ito & Mitomi addressing Japan's tender offer rules, this newsletter further examines the tender offer process under the Securities and Exchange Law of Japan (the "SEL"), as revised by the amendments that are scheduled to become effective by December 13, 2006. This newsletter focuses in particular on revisions to the SEL aimed at making disclosures to shareholders and other investors more robust when a bidder launches a tender offer for the shares of another company.1
Point 1 Expanded Disclosures to Shareholders and Other Investors
As part of a tender offer that is fair to the target's shareholders and other investors, these parties need to receive sufficient information to make informed investment decisions. To ensure fuller disclosure by both bidders and targets, the amended SEL will (1) require a bidder to provide more specific information in a "Tender Offer Registration Statement" and other documents as well as other information that was not previously required, and (2) require the target to express its opinion on the tender offer, and provide the target with an opportunity to make inquiries to the bidder within a codified framework.
The following is an overview of these revisions.
Point 2 Expanded Disclosure in Tender Offer Registration Statements
(1) Summary of the Amendments
The first amendment to the SEL with respect to disclosures to shareholders and other investors in a tender offer is to require expanded disclosure in the Tender Offer Registration Statement.
(a) Detailed Disclosure of Post-Tender Offer Management Policies
When a tender offer is made, shareholders and other investors need to understand key aspects of the target's circumstances after the tender offer is completed, to be able to make an informed investment decision. To ensure that shareholders and other investors have this information, the amended SEL will require more specific disclosures in the Tender Offer Registration Statement on a number of matters concerning the target after completing the tender offer, such as the bidder's involvement in the target's management.
(b) Disclosing Valuation Reports
Prior to these revisions to the SEL, there were concerns that a conflict of interest might arise between a bidder and a target's shareholders when the management of the target or another party acts as a bidder in an MBO2 or when a parent company makes a tender offer for the shares of its subsidiary.3
In response to these concerns, if a bidder obtains a valuation report from a third party on the target or its shares in connection with a tender offer and considers the valuation report as a factor in determining the tender offer price, the bidder will be required under the amended SEL to attach a copy of the valuation report to its Tender Offer Registration Statement and provide specified disclosures about the report, including details such as the bidder's decision-making process leading to the tender offer and measures it has taken to avoid conflicts of interest relating to the tender offer.
(2) Matters to be included in the Tender Offer Registration Statement (Article 27-3(2) of the amended SEL)
The additional and more specific matters to be stated in a Tender Offer Registration Statement (Form No. 24 of the Cabinet Office Ordinance concerning the Disclosure of Tender Offers for Shares and Other Securities by Parties Other Than the Issuer (the "Cabinet Office Ordinance")) under the amended SEL can be broadly classified into the following two categories.5
(a) Disclosing Post-Tender Offer Management Policies
When a tender offer is made for the purpose of gaining control of a target, a bidder is currently required to specify, under "Purpose of the Tender Offer" in the Tender Offer Registration Statement, its intended management policies after gaining control of the target or its plan after becoming involved in the target's management. Once the amended SEL comes into effect, a bidder will also have to specify how it will gain control or become involved in the management of the target. In addition, if a bidder plans to take any action that will significantly alter or affect the management policies of the target, it will be required to state not only the details of any changes, but also explain the necessity of such changes. A bidder will also have to disclose matters in its Tender Offer Registration Statement such as any plans to acquire additional shares or other equity securities after the tender offer or any likelihood of delisting the target from a stock exchange or an over-the-counter market.
(b) Preventing Conflicts of Interest in MBOs and Tender Offers by Parent Companies
A new disclosure item titled "Background of Calculation" for the tender offer price has been added under the section for "Tender Offer Period, Tender Offer Price, and Number of Shares to be Acquired" in a Tender Offer Registration Statement. As discussed in Paragraph (1)(b) above, if a bidder obtains a valuation report from a third party in connection with calculating the tender offer price, the bidder must disclose certain information regarding the valuation report. Under the amended form of the Tender Offer Registration Statement, such disclosure shall be made in this section titled "Background of Calculation" and must include the name of such third party, an outline of the contents of the valuation report, and how the bidder's decision was made in reliance on the valuation report. A bidder making an MBO or a tender offer for its subsidiary's shares will, in particular, also be required to include specific details of any measures it has taken to ensure that the tender offer price is fair.
A bidder will need to take additional precautions in making disclosures for the item titled "Details of any Agreement between the Bidder and the Target or its Officers." If a bidder makes an MBO or a tender offer for the shares of its subsidiary, it will now be required to give specific details of (i) the decision-making process leading to its decision to make the tender offer, and (ii) any measures it has taken to avoid a conflict of interest.
Point 3 Target's Obligation to Express its Opinion and Codified Framework for a Target to Make Inquiries
The second amendment to the SEL, regarding disclosures to shareholders and other investors during a tender offer, will require a target to express its opinion on the tender offer in an "Opinion Report" and will require a bidder to provide a target with the opportunity to make inquiries to the bidder under a codified framework.
(1) Compulsory Expression of Opinion
(a) Why did the Target's Opinion Become Compulsory?
Prior to the amendments, a target and its officers were only required to submit an Opinion Report if their opinion on the tender offer was announced through news media such as daily newspapers, television or radio, or was presented to more than 10 shareholders.
Although the standard practice has usually been for a target or its officers to express an opinion regardless of whether it was compulsory, in light of the importance any opinion of a target may have for shareholders and other investors to make informed investment decisions, a target6 will be required under the amended SEL to express its opinion whenever it is subject to a tender offer.
(b) Details of Opinion Reports
Opinion Reports must be prepared in accordance with Form No. 4 of the Cabinet Office Ordinance7 (Article 27-10(1) of the amended SEL).
First, each Opinion Report must disclose the target's opinion on the tender offer as to whether it supports or opposes the tender offer. Additionally, a target can also state that it is neutral with respect to the tender offer or that it chooses to withhold its opinion. The target must give specific reasons for its opinion, and if it chooses to withhold its opinion, the target must give specific reasons for not expressing its opinion and state whether or not it expects to express its opinion in the future.
The target must also disclose whether it plans to effect any anti-takeover measures in response to the tender offer and, if it does, it must include specific details of those measures. If the target is subject to an MBO or a tender offer by its parent entity and the target has taken any measures to avoid a conflict of interest, the target must also include specific details of such measures.
If a target wishes to make any inquiries to the bidder (see Paragraph (2) below, "Opportunity to Make Inquiries to the Bidder") or a request for an extension of the tender offer period8 , such inquiries or request can be made in its Opinion Report.
(c) Submission Deadline
A target must submit its Opinion Report to the Director General of the Kanto Local Finance Bureau (the "DKLFB") and send a copy of the report to the bidder within 10 business days from the public notice date of commencement of the tender offer.
(2) Opportunity to Make Inquiries to the Bidder
(a) Codified Framework to Allow Targets to Make Inquiries
If the target of a tender offer has an opportunity to make inquiries to the bidder to highlight any differences of opinion between the target and the bidder, this process is expected to help shareholders and other investors make more informed investment decisions. For this reason, the amended SEL will provide for a codified framework within which the target of a tender offer can make inquiries to the bidder.
However, the amended SEL only establishes the framework for a target to make inquiries and does not mandate such inquiries or provide for any specific information to be exchanged, leaving it up to the discretion of the parties for each specific case.9
As mentioned above, a target can make inquiries to a bidder within this legally recognized framework by stating its questions in its Opinion Report.10
(b) Answer Report
If a target makes any inquiries in its Opinion Report, then the bidder has an obligation to submit an "Answer Report" to the DKLFB (in accordance with Paragraphs 11 and 13 of Article 27-10 of the amended SEL and Form No. 8 of the Cabinet Office Ordinance11 ) and a copy of the Answer Report to the target immediately after submitting it to the DKLFB. The submission to the DKLFB must be made within five business days from the date of receipt of the target's Opinion Report.
If a bidder makes any false statement or other misrepresentation of any material matter in its Answer Report, it will have potential liability to any party that sells or otherwise transfers its shares or other equity securities to the bidder through the tender offer (Article 27-20(1)(iv) and Article 18(1) of the amended SEL). Also, a bidder will be subject to potential action by regulatory authorities for any improper disclosures in its Answer Report.
While the bidder may respond to the target's inquiries in its Answer Report, this does not mean it has an obligation to answer every inquiry. If it believes an answer to a particular inquiry is unnecessary, the bidder may choose not to answer that inquiry by stating the reason it believes an answer is unnecessary. This flexibility reflects the view that by refusing to answer a specific inquiry, the bidder may be providing useful information for shareholders and other investors in connection with their investment decisions.
- This newsletter is based on the drafts of the amended enforcement order and the ordinance of the Cabinet Office that were published in September 2006.
- MBO stands for Management Buy-Out, which means the purchase of a company by its management and related parties.
- Kōkai Kaitsuke Seido Tō Wākingu Gurūpu Hōkoku (Tender Offer System Working Group Report) (First Subcommittee, Sectional Committee on Financial System, Financial System Council, Financial Services Agency).
- Article 12 of the Cabinet Office Ordinance.
- In addition to these revisions, bidders will be required to include "any other information that is considered necessary for investors to decide whether to accept the tender offer" when making disclosures in "Other Matters" under "Condition of the Target."
- Officers will no longer be deemed an entity that is required to express an opinion after the amended SEL becomes effective.
- Article 25(2) of the proposed Cabinet Office Ordinance.
- We will address the target's right to request an extension of the tender offer period in another installment of this series.
- The provisions of Article 27-10(2)(i) of the amended SEL only provide for "inquiries to the bidder," and neither the amended SEL nor the draft form of the Opinion Report specifies how and what inquiries should be made.
- The amended SEL provides that a target can make inquires by stating them in its Opinion Report, which means that legally it is only provided with the opportunity to make inquires to the bidder once. However, targets are free to make inquiries without stating them in a formal Opinion Report, so there is, in effect, no limit to the number of times a target can make inquiries.
- Article 25(4) of the proposed Cabinet Office Ordinance.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome.