Land of the Falling ‘Poison’ Pill: An Analysis of Japan's Defensive Measures
The advent of the ‘shareholder rights’ plan’, more popularly known as the ‘poison pill’, fundamentally altered the trajectory of American corporate governance. Intended to defend vulnerable boards from corporate raiders, the ‘poison pill’ was embraced by US managers in the 1980s as a lifeline in a sea of hostile takeovers. When pundits predicted an imminent wave of hostile takeovers in Japan in the mid-2000s, Japanese boards appeared to embrace the American invention of the ‘poison pill’ with equal enthusiasm.
Japan’s experience should have been a ringing endorsement for the utility of American corporate governance solutions in foreign jurisdictions and served as evidence supporting the view that corporate governance around the world is destined to converge on the American model. That would have been the case but for two ‘inconvenient truths’ that foreign observers and corporate law scholars have overlooked. These inconvenient truths not only make what occurred in Japan entirely different from what occurred in the United States, but also offer novel insights into how defensive measures have evolved in an unpredictable way in the world’s third largest economy. They also suggest areas for future comparative corporate governance research.
The first inconvenient truth, which Dan W Puchniak and Masafumi Nakahigashi previously explored in their article, ‘The Enigma of Hostile Takeovers in Japan: Bidder Beware’, is that Japan’s ‘poison pill’ is fundamentally different from the US-style ‘poison pill’. The second inconvenient truth, which is exposed in our recent Working Paper, ‘Land of the Falling “Poison” Pill: Understanding Defensive Measures in Japan on Their Own Terms’, is that the ‘poison pills’ that were the darling of Japanese companies in the mid-2000s have, following their brief moment in the sun, gone into sustained decline in the most striking reversal of its kind outside of the US and appear to be heading towards extinction.
Specifically, after an initial boom from 2005 to 2008, during which hundreds of Japanese companies adopted ‘pills’ each year, new adoptions of the ‘pill’ fell precipitously to less than single digit numbers in the decade that followed. Then, in 2014–2015, the rate at which companies in Japan which had previously adopted a ‘pill’ and then later decided to ‘remove’ it spiked. What happened in 2008 to cause listed companies in Japan to virtually cease adopting new ‘pills’ and what has sustained this ‘new normal’ over the past decade? Why did the rate of non-renewals spike around 2013–2014 and why has it continued to rise since?
Our Working Paper seeks to solve these puzzles by providing what is, to our knowledge, the first in-depth analysis of Japan’s surprising reversal on the ‘poison pill’. Specifically, the Working Paper offers three explanations for the decline of Japan’s ‘poison pill’ supported by empirical data, case studies, Japanese jurisprudence, and an in-depth review of Japanese academic literature and financial industry reports. First, the fact that the prophesied tsunami of hostile bids in the mid-2000s failed to produce even a single successful hostile takeover—combined with a dearth in hostile acquirers following the 2008 Global Financial Crisis—reduced the threat of hostile takeovers that was an impetus for Japanese managers to adopt the ‘pill’ in the pre-2008 boom years.
Second, the so-called ‘pill’ in Japan is a far cry from the potent poison that many thought it would be when the government approved its use in 2005—which, at that time, appeared to have been created ‘in the shadow of Delaware’. Over the past decade it has become increasingly clear that the so-called ‘pill’ in Japan lacks the active ingredient of its American namesake: providing the board—without shareholder approval—with a veto right over a hostile bid. Empirical evidence demonstrates that almost all so-called Japanese ‘pills’ require some form of shareholder approval—which makes sense considering they have been designed in the shadow of ambiguous Japanese (not Delaware) jurisprudence. This scant and ambiguous jurisprudence has not established that boards—without shareholder approval—can adopt, maintain or even trigger a ‘pill’ in Japan. We query whether a ‘pill’ that requires shareholder approval should even be called a ‘pill’, a point discussed in detail below. Here, the crucial point is that, as it has become increasingly clear that Japanese ‘pills’ fail to provide the board with an unambiguous veto—without shareholder approval—over a hostile bid, the incentive for management to adopt them has significantly diminished.
Third, more recent changes to Japan’s corporate governance environment have provided the impetus for increased institutional investor resistance to the introduction of new ‘pills’ and, more importantly, for approving the renewal of expiring ones. In 2015, Japan adopted a ‘comply or explain’ Corporate Governance Code with an idiosyncratic provision: the requirement that companies comply with having no poison pill or explain why they have one, which is a particularly challenging task in the only major developed economy that has yet to have a successful hostile takeover. Then, in 2017, Japan amended its Stewardship Code, which now requires institutional investors to disclose their votes on individual agenda items, including any support for the renewal of a poison pill. Again, this is a particularly challenging task in the only major developed economy that has yet to have a successful hostile takeover. The timing appears to be significant: shortly before Japan’s revised Stewardship Code came into effect, the ratio of removals/adoptions of the ‘poison pill’ increased markedly, making this the most devastating blow yet to the ‘pill’ in Japan—and corresponding to institutional investors voluntarily disclosing their votes to prepare for the inauguration of the Stewardship Code. This timely fall in the ‘poison pill’ is highly interesting, as it suggests that Japan’s Stewardship Code amendment may have prevented institutional investors from continuing to act in support of management, which is a tangible impact on corporate governance not previously foreseen or contemplated by the growing international stewardship literature.
Alan K Koh is Research Associate at the National University of Singapore (NUS) Centre for Asian Legal Studies (CALS) and an Associate Editor of the Asian Journal of Comparative Law.
Masafumi Nakahigashi is a Professor at the Law Faculty of Nagoya University.
Dan W Puchniak is the Director of the National University of Singapore (NUS) Centre for Asian Legal Studies (CALS) and an Associate Professor at NUS Law.
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