Designing a New Framework to Regulate Hostile Takeovers in a Changing Japan

This Article reexamines the existing theoretical framework of hostile takeover regulation, with the goal of providing greater analytical flexibility to aid in the development of an appropriate takeover regime for a changing Japan and other countries.  Such a revised takeover regime can contribute to Japan’s finally achieving its basic goal for the last decade—a pivot to sustained economic growth.  The recent emphasis in Japan on innovation, productivity and capital efficiency, a stock market rally that has drawn the interest of foreign investors, ongoing corporate governance reforms, a new burst of hostile takeover cases since 2021, and significant revisions to M&A best practice guidelines may provide a new opportunity to reach a long-sought “tipping point.”  Supported by a more welcoming attitude toward hostile takeovers, the old paradigm of “fortress Japan” is in the process of being supplanted by a new “market-oriented Japan.”  

The above changes both create a greater need for effective takeover regulation and a new opportunity for rising institutional players to assume a greater role.  Accordingly, there is a new urgency to reconsider both the theory and practice of Japan’s approach to the regulation of hostile takeovers, in order to update the current framework in response to changing conditions and to make it a regime that is commensurate with Japan’s important position in global business and financial markets.       

Research to date has generally emphasized the contrasting models of a shareholder-oriented UK system and a board-oriented US regime.  But in both cases a single “subordinate lawmaker,” the takeover panel in the UK and Delaware courts in the US, makes the rules and enforces them.   Under this analysis, Japan has a mixed and incomplete system of regulation with competing subordinate lawmakers.  We utilize Australia as a “new” point of reference in the theoretical framework for hostile takeover regulation and institutions, “in-between” the US and the UK, since it separates the rulemaking and enforcement functions and has a takeover panel with substantially limited authority and activities compared to the UK.  

We discern three basic roles in a framework for takeover regulation:  (1) a “Rule-maker,” (2) a “Bid Decision-maker,” and (3) an “Umpire” (both adjudicator and propagator of best practice norms).  Applying this revised framework to Japan, we find that, although all relevant institutional players have improved their capabilities, the strength of shareholders has increased substantially more than that of courts and independent directors.  Thus, the main weakness in the Japanese system is having the courts as the primary Umpire.  Our main recommendation is that Japan consider an Australian-style, limited takeover panel for its Umpire, together with a separate Rule-maker.  We hope that our analysis will stimulate further research and discussion on a topic that is of renewed importance in Japan and elsewhere.