UT Soft Law Review

UT Soft Law Review No.2 2010are many business managers who would like to have the opportunity to convey their ownthoughts clearly to the shareholders when their company is targeted to hostile takeover.Other motivations include the concern about abusive takeover, the concern about theacquisition at very low price when the stock price is discounted, values regarding employees’interests and corporate culture, and simple dislike of hostile takeover.Fujita: Thank you. Next let’s look into the details of takeover defenses. Various defenseplans such as a “trust-type rights plan” had been tried for a while, but, currently, theoverwhelming majority is so-called “prior warning type” defense plan. Professor Tanaka, canyou introduce the characteristics of recent defense measures to us?Tanaka: The “prior warning type” defense plan works like this (we will sometimes call it“the defense plan,” or “the plan”). A company (hereinafter the adopter) adopts the defenseplan and announces it in public. The plan demands, among others, any person trying toacquire the adopter to take several steps. In particular, any person, who wants to buy theadopter’s shares beyond a certain threshold (typically 15% or 20% of its outstanding shares)or wants to launch a tender offer bid (TOB) for the adopter’s shares, is required by the planto provide the board of directors of the adopter with certain information (identity of theacquirer, the purpose and conditions of the acquisition, etc.). The defense plan also requestscertain time for the board to deliberate the acquisition offer, including the time to considerand offer to its shareholders an alternative (e.g., some restructuring plan). The defense planalso warns that, if the acquirer buys the adopter’s shares beyond the threshold or launchesthe TOB without complying with these requests, then the adopter will counteract by theimplementation of some defense measures allowed by law, including, but not restricted to, theallotment of discriminative share options to all its shareholders without contribution. Here,“discriminative” means that, even though the share options are alloted to the acquirer as longas it is a shareholder of the adopter, the acquirer does not have any rights to execute theshare options, while other shareholders can execute these options at the very low exerciseprice to have new shares issued. Such issuance of new shares, of course, decreases the size ofshareholding of the acquirer in the adopter. The acquirer could still be economically fine ifthey can transfer their share options to a third party at the fair price, but the transfer of shareoptions requires the approval of the board of directors of the adopter, according to thedefense plan. Therefore, if it is not approved and other shareholders execute their shareoptions, the acquirer will suffer from financial loss as well as decrease in the shareholding.According to the statement of the “prior warning type” defense plan the primary purposeof the plan is not to frustrate the hostile acquisition itself, but to require the acquirer toprovide information and time necessary for the adopter’s shareholders to deliberate the meritsof the acquisition offer. Thus, as long as the acquirer complies with the rules provided by thedefense plan, then, the plan says, as a general rule, the board of directors of the adopter willnot implement any defense measures and let its shareholders to decide whether or not toaccept the acquisition offer. Most “prior warning type” defense plans state, however, that even47