23 Asian Legal Business | October 2024 buyers, such as operating companies,” points out Kohei Okusa, partner at Japanese law firm Miura & Partners. However, even after the METI initiative was released, “in reality, we are still seeing cases where Japanese boards block unsolicited bidders at a very early stage,” says Oda. She emphasises that Japanese companies should be cautious and avoid simply rejecting unsolicited M&A proposals without providing clear and specific reasons. In one of the latest notable examples, the board of Seven & i Holdings – owner of the 7-Eleven convenience store chain - has turned down a substantial cash takeover bid of nearly $39 billion from Canada’s Alimentation Couche-Tard. The board contended that the offer significantly underestimates the value of the Japanese company and fails to account for the regulatory challenges that any potential agreement would face. The Canadian company is anticipated to return with a second offer, while both international and local private equity firms are keenly looking to stake their claim in the retail giant. Meanwhile, the Japanese group is reportedly considering the sale of nonessential assets to buyout firms or other potential investors. “Recently, we are seeing unsolicited offers being made after friendly deals are announced. The ‘fiduciary out’ scenario from a friendly deal is no longer hypothetical. Japanese boards need to be prepared to make a difficult determination on competing bids,” says Oda. Shareholder activism Moreover, the growing dealmaking appetite is closely associated with a significant development: the rise of shareholder activism. Traditionally, in the Japanese market, financial services firms and corporations maintained substantial stakes in one another as a defensive strategy against potential takeovers, limiting shareholder activism. Now, the new development may indicate the diminishing influence of “cross-shareholdings,” especially in light of new government regulations requiring the disclosure of shareholdings. Also, the Tokyo Stock Exchange (TSE) is urging Japanese public companies to enhance their shareholder value and operational efficiency, say lawyers. A common benchmark that activist investors rely on is the price-to-book Ratio (PBR), particularly when it exceeds 1.0x, serving as a critical indicator for evaluating these companies. As a result, Japanese firms are anticipated to explore strategies aimed at boosting their business efficiency. “Previously, a typical request from activist shareholders was to increase the return to shareholders through dividends or stock repurchase,” says Oda. “Recently, their requests are more diverse and often involve M&A strategies, such as divestiture of noncore assets. From the perspective of law firms, being capable of handling the dynamics of complex corporate transactions is key for counselling on shareholder activism.” Looking ahead, lawyers expect to see more inbound Japanese M&A transactions where foreign investors look to acquire Japanese assets under conducive market environment and favourable reforms. “In particular, we expect international PE firms will be key players in the next wave of M&A,” says Oda. “Historically, the key players for PE transactions in Japan were domestic Japanese PE sponsors, together with a handful of big-name U.S. sponsors that have large teams in Tokyo. Recently, however, many additional major international PE sponsors are entering the Japanese market,” she adds. Acknowledging that the cultural and language barrier is one of the most common challenges for inbound investors, Oda suggests that investors should have people on the ground in Japan, and who are fluent in Japanese. “We are also seeing more consortium deals where an international PE firm teams up with a domestic PE firm to acquire a Japanese target company,” she says. “It is not easy for new foreign investors who do not have experience in acquiring Japanese companies to do a buyout of a Japanese corporation alone.” M&A
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