UT Soft Law Review

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UT Soft Law Review No.2 2010Article 280-39(4) of that Code.The reason for not permitting a share option issue principally for the purpose of maintainingor securing control of the management of the relevant company is, of course, because thedirectors stand in a fiduciary relationship in respect of the company’s shareholders, who arethe proprietors of the company. It follows that in the application of special circumstances thatwould justify a share option issue from the viewpoint of protecting the interests of the company’sshareholders as a whole, as an exception to the general rule stated above, the correctview to be taken is that, [due to the special circumstances], such a share option issue, even ifmade principally for the purpose of maintaining or securing control of the company by a particularshareholder, would not constitute an unfair issue.An example of such special circumstances would be where a hostile buyer of a company’sshares intends to simply or largely prey on the company. Examples of such exploitation wouldbe 1 where the buyer has no true intention of playing a constructive role in managing thecompany, and is acquiring the shares for the sole purpose of boosting the share price so as toforce the company and its supporters to take the shares back at an inflated price (known as a‘greenmail’ case); 2 where the buyer acquires the shares with the aim of gaining temporarycontrol of the company so that it can conduct a ‘scorched earth’ policy of managementtowards the company, whereby it has the intellectual property, know-how, trade secrets, principaltrading partners and customers that the company needs to conduct its business transferredto itself or to its group companies; 3 where the buyer acquires the shares with theexpectation upon gaining control of the company of diverting the company’s assets as securityfor or as sources of funds to repay debts of the buyer or its group companies; 4 where thebuyer acquires the shares with the aim of gaining temporary control of the company in orderto sell off its high-value assets such as real estate and/or securities that are for the time beingnot pertinent to the company’s business. In that event, the buyer’s aim will be to use the profitsfrom such divestment to pay out temporarily high dividends or, to set its sights on takingadvantage of the spike in the company’s share price that would result from the payment oftemporarily high dividends and sell off the shares when they peak. A hostile buyer acquiringshares for such exploitative purposes will not deserve protection as a shareholder, and sinceit will be clear that if nothing is done about such hostile buyer, the interests of the othershareholders will be harmed, the proper view to take is that the board of directors carryingout a share option issue principally for the purpose of maintaining or securing control of thecompany by a particular shareholder will be permitted as just and proper – to the extentjudged to be necessary and reasonable as a means of defense against such buyer.”“It follows that in a situation where a dispute over the control of management of a companyhas in fact arisen, if a share option issue is carried out for the purpose of maintaining orsecuring control of the company by a particular shareholder, as a general rule a petition for aninjunction to stop the issue should be allowed on the grounds that it constitutes an unfair113
UT Soft Law Review No.2 2010issue. However, in the event that the company has prima facie evidence or proves that specialcircumstances are applicable that would justify such share option issue from the viewpoint ofprotecting the interests of shareholders as a whole (specifically, where the sound and propermanagement of the company is not the hostile buyer’s true aim, and the acquisition of controlby the hostile buyer will result in losses to the company that will be hard to restore), noinjunction may be issued against a share option issue that would affect who has control of thecompany.”114
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