Tender Offer Period, Restrictions on Altering Tender Offer Terms and Withdrawing Tender Offers, and Obligation to Purchase All Tendered Shares
This third installment in a series of newsletters by Ito & Mitomi on revisions to Japan's tender offer system examines: (1) the tender offer period; (2) restrictions on altering tender offer terms and withdrawing tender offers; and (3) the obligation to purchase all tendered target shares.
1. Tender Offer Period
(1) Tender Offer Periods - from Calendar Days to Business Days
Under the current law, a bidder must set a tender offer period of anywhere from twenty days to sixty days, but if there are holidays such as the year-end and new-year period during this time, the target and the shareholders/investors often do not have enough time to properly consider the offer. In order to address this problem, the amended Securities and Exchange Law ("SEL") and its proposed enforcement order (the "SEL Enforcement Order") provide that all tender offer periods1 will be based on business days rather than calendar days (Article 8(1) of the proposed SEL Enforcement Order). With these revisions, even with the shortest possible tender offer, the target and the shareholders/investors will have about one calendar month to consider the bid.
(2) Extending the Tender Offer Period by Request from the Target
If a bidder sets a short tender offer period, especially in the situation of a hostile takeover, there may not be sufficient time for the management of the target to present a counterproposal and for the investors to give appropriate consideration to the bid and make an informed decision based on the counterproposal. When the SEL amendments take effect, a target will have the right to request an extension of the tender offer period if the bidder has set a period of less than thirty business days, in which case the tender offer period will be extended up to thirty business days from the day of public notice of commencement of the tender offer (Article 27-10(2)(ii) and Article 27-10(3) of the amended SEL, and Article 9-3(6) of the proposed SEL Enforcement Order).
In order to request an extension of a tender offer period, the target must include in its Opinion Report to be submitted no later than the statutorily required deadline (i) its request for an extension, (ii) the length of the extended tender offer period, and (iii) the reason for the extension.2 After requesting an extension of the tender offer period, the target must give public notice of its request and announce the length of the extended tender offer period on or before the day after the Opinion Report submission deadline (Article 27-10(4) of the amended SEL, Article 25-2 of the proposed Cabinet Office Ordinance concerning the Disclosure of Tender Offers for Shares and Other Securities by Parties Other Than the Issuer (the "Cabinet Office Ordinance")).
If a bidder sets an initial tender offer period that is shorter than thirty business days, it will be required to disclose in its Tender Offer Registration Statement that the tender offer period might be extended if requested by the target.3
Accordingly, since a bidder will be required to extend any initial tender offer period that is less than thirty business days if requested by the target, in a hostile bid situation, it is recommended that the bidder consider setting the initial tender offer period for thirty business days or more.
2. Expanded Flexibility in Altering the Tender Offer Terms and Withdrawing the Tender Offer
(1) Reducing the Tender Offer Price
The current law does not allow bidders to alter the tender offer terms such as reducing the tender offer price in a way that is detrimental to the selling shareholders (Article 27-6(3) of the former SEL, Article 13 of the former SEL Enforcement Order). If, however, a bidder is unable to reduce the tender offer price when, for example, the target dilutes its share price by taking anti-takeover measures such as a stock split, the bidder might be subject to unreasonable damage.
Under the amended SEL, if the target splits its shares or investment units or issues shares or stock acquisition rights without consideration, the bidder will be permitted to reduce its tender offer price in proportion to the dilution of the share value (Article 27-6(1)(i) of the amended SEL, Article 13(1) of the proposed SEL Enforcement Order, and Article 19(1) of the proposed Cabinet Office Ordinance).
(2) Withdrawing Tender Offers
In the past, bidders were not able to withdraw tender offers except in narrowly tailored circumstances stipulated by a SEL Enforcement Order because of the risk of bidders using tender offers to manipulate the market, which would have a significant impact on investors and shareholders and the stock market. However, given the number of anti-takeover defenses that have been recently devised and used, certain acts by the target would not fall under the traditional permitted reasons for a withdrawal. In some cases, depending on the nature of a target's act, the continuation of the tender offer would cause the bidder significant damage.
In order to avoid such a situation, the amended SEL Enforcement Order permits a bidder to withdraw its tender offer if the target carries out any of the following acts in addition to those acts already prescribed4 (Article 14(1) of the proposed SEL Enforcement Order).
(a) Conducting a share or investment unit split.
(b) Issuing shares or stock acquisition rights without consideration.
(c) Issuing new shares, stock acquisition rights, bonds with stock acquisition rights, or investment units (excluding Items (a) and (b) above).
(d) Disposing of treasury stock (excluding Item (b) above).
(e) Granting to outstanding class shares veto rights or the right to appoint directors and/or statutory auditors.
(f) Disposing of or transferring any material assets.
(g) Taking out a substantial loan.
(h) Deciding to maintain a decision to issue new shares or conduct any other acts that reduce the bidder's shareholding ratio after completion of the tender offer.
(i) Deciding not to amend veto rights or the right to appoint directors and/or statutory auditors, which in either case had been already granted to certain class shares as of the date of public notice of commencement of tender offer.
In addition, successful consummation of a tender offer by the bidder will also be impaired when a subsidiary of the target, rather than the target itself, takes some actions detrimental to the bidder. Accordingly, under the amended SEL, certain actions taken by a target's subsidiary are also added to the grounds for the bidder to withdraw its tender offer.
However, similar to the restriction applicable under the existing system, the amended SEL Enforcement Order provides that the bidder cannot withdraw its tender offer if a prescribed act by the target is only minor (Article 14(1) of the proposed SEL Enforcement Order). If, for example, a target causes a decrease in the bidder's shareholding ratio by less than 10% or takes out a substantial loan for less than 10% of the book value of its total assets, this would not be considered major enough to permit the bidder to withdraw its tender offer (Paragraphs (1) through (3) of Article 26 of the proposed Cabinet Office Ordinance).
3. Obligation to Purchase All Tendered Shares
(1) Limitation on the Imposition of Cap on Number of Shares to Be Purchased
Under the current system, a bidder may set a cap on the number of shares it purchases through a tender offer. If the total number of shares tendered by shareholders of the target exceeds the cap, the bidder is required to purchase shares from each tendering shareholder on a pro rata basis (Article 27-13(4) and Article 27-13(5) of the former SEL).5
However, given the risk of the target company being delisted in the event of a bidder owning shares above a certain ratio, the shareholders of the target that were unable to sell their shares through the tender offer might face a significantly unstable situation. In order to remedy this, the amended SEL provides that, if a bidder makes a tender offer that will result in its ownership of two-thirds or more of the shares of the target, it will not be permitted to set a cap on the number of shares to be purchased at the tender offer; in other words, the bidder will be required to purchase all of the shares tendered by the target's shareholders (Article 27-13(4) of the amended SEL, Article 14-2-2 of the amended SEL Enforcement Order).
(2) Compulsory Purchase of Shares of Other Classes
In addition to the purchase obligations of all tendered shares referenced in Section 3(1) above, under the amended SEL, if a bidder's shareholding ratio in the target company is two-thirds or more after a tender offer, it will be a condition to a tender offer to offer to purchase all shares with voting rights of the target (including shares of other classes that can be converted into voting shares) (Article 27-2(5) of the amended SEL, Article 8(5)(iii) of the proposed SEL Enforcement Order, and Article 5(5) of the proposed Cabinet Office Ordinance).6
In this case, the bidder must set the same tender offer period for all of the shares that are subject to the tender offer, and must make a specific disclosure regarding any difference in the tender offer price among the different classes of shares in the "Calculation Basis" column of the Tender Offer Registration Statement.7
Accordingly, once these amendments take effect, if a bidder aims to acquire two-thirds or more of the shares of a target through a tender offer for a reason such as to acquire a sufficient number of shares necessary to pass a special resolution at any shareholders' meeting of the target, it is obligated to purchase all of the shares tendered by the shareholders of the target, including common shares and other class shares with voting rights.
- While it has not been entirely clear if the tender offer period starts on the day public notice of commencement of the tender offer is made or the day immediately following the day of such public notice, the amended law expressly states that the tender offer period starts from the day of public notice of commencement of the tender offer (Article 8(1) of the proposed SEL Enforcement Order states the tender offer period will be "calculated from the day of public notice of commencement of the tender offer").
- See Note (8) regarding Paragraph 8 of Form No. 4 of the proposed Cabinet Office Ordinance.
- Specifically, the bidder must state in its Tender Offer Registration Statement, in addition to the length of the tender offer period initially set by the bidder, (i) under the "Tender Offer Period" column, the length of the tender offer period if extended upon request by the target and the contact details to confirm if the tender offer period has been extended and (ii) under the "Settlement Commencement Date" column, the date on which settlement will commence if the tender offer period is extended (See Section 1, Paragraph 4(1)(ii) (Possibility of Extension by Request of Target), Section 1, Paragraph 4(1)(iii) (Contact Details to Confirm Extension of Tender Offer Period), Notes (6)b, (6)c, and (12)a of Form No. 2 of the proposed Cabinet Office Ordinance). In addition to such disclosure in a Tender Offer Registration Statement, when the bidder sets an initial tender offer period of less than thirty business days, the bidder must also disclose in its public notice of commencement of the tender offer that the tender offer period may be extended upon request by the target (last paragraph of Article 27-3(1) of the amended SEL). However, so long as these disclosures are properly made in advance as set forth above, the bidder will not be required to make a further disclosure, such as submitting an amendment to the Tender Offer Registration Statement, or amend its public announcement, even if the target subsequently actually makes a request to extend the tender offer period.
- Traditional reasons for the withdrawal of a tender offer include restructuring of the target such as a merger or business transfer, filing a petition for the commencement of insolvency procedures by or against the target, filing an application to delist the target, and commencing litigation involving the target (See Article 14 of the former SEL Enforcement Order).
- Article 27-13(4)(i) of the former SEL permitted the bidder to attach the following closing condition to its tender offer: "if the total number of tendered shares is less than the number of shares intended to be purchased, the bidder shall not purchase any of the tendered shares." From this language, it was assumed that the minimum number of tendered shares required to consummate a tender offer was the same as "the number of shares intended to be purchased." Accordingly, under the former SEL, if the bidder lowered the minimum number of tendered shares required for consummating the tender offer, it would inevitably violate the prohibition against lowering "the number of shares intended to be purchased" (which cannot be lowered under Article 27-6(1)(ii) of the amended SEL (Article 27-6(3) of the former SEL)), and thus there had been a question as a matter of law whether such minimum number of tendered shares can be lowered or not. (However, there have been a few cases where this has been done.) The amended SEL has remedied this situation by changing the language in Article 27-13(4)(i) to provide that "if the total number of tendered shares is less than the number of shares specified in advance in the public notice of commencement of the tender offer and the Tender Offer Registration Statement as all or part of shares intended to be purchased, the bidder shall not purchase any of the tendered shares." A reduction in the minimum number of tendered shares appears to be permitted since now it can be made without a prohibited amendment to "the number of shares intended to be purchased."
- However, such requirement does not apply to cases where a general meeting of class shareholders of the target company with respect to the shares that are not subject to the tender offer has been held and there has been an approval by the said general meeting for the tender offer to be carried out without the acquiring company purchasing such class shares or where there are less than twenty-five (25) shareholders with shares that are not subject to the tender offer and each of such shareholders has given its consent to the tender offer (Article 5(3) of the proposed Cabinet Office Ordinance).
- See Note (6)e in Form No. 2 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.