DealLawyers.com Blog

April 24, 2006

Japan’s Pension Fund Association Targets Poison Pills

From ISS’ Friday Report: The Pension Fund Association (PFA), which represents Japan’s corporate pension funds, plans to vote against directors who adopt “poison pill” plans and other takeover defenses without seeking shareholder approval.

The influential PFA manages 12 trillion yen in assets (approximately $104 billion), 4 trillion yen of which are invested in major domestic, exchange-listed corporations. While the association’s investments represent only a small fraction of Japanese corporate pensions, it acts as a manager of last resort for insolvent funds.

Beginning with annual meetings in May, the PFA said it will vote against incumbent directors at companies that adopt poison pills without seeking shareholder approval of such provisions. The PFA also will oppose takeover defenses that can be implemented at the sole discretion of the board of directors, according to the Nihon Keizai Shimbun.

The PFA is responding to the increasing number of Japanese companies that have implemented takeover defenses or have announced plans to do so this year.

The PFA is focusing on companies with the “advance notice” (or “advance warning”) poison pill, such as the defense announced by Matsushita Electric in March. These defenses may or may not appear on corporate ballots, and contain limited detail on how options or other securities would be used to dilute the value of a raider’s equity position, or precisely what would trigger the issuance. Following court rulings last year that invalidated more detailed poison pill plans at Nireco and other firms, the “advance notice” model appears to be gaining currency among a small but growing number of Japanese firms.

In the past, the PFA has supported “chewable” plans–those put forth for shareholder approval, that have a sunset provision of at most three years, and other features designed not to deter well-financed bids that an “independent committee” deems to be in the interest of shareholders. But the new advance notice pills appear to leave considerable discretion to the board of directors to determine whether and how to deploy the pill.

So far, there have been seven advance notice pills and one “trust type” pill (where warrants are issued to a trustee) among the 265 firms that held their meetings during the first three months of the year, according to ISS data. Of those eight firms, five put their defenses in place without a shareholder vote. Approximately 80 percent of Japanese firms will not hold their annual meeting until June.

The PFA is calling on companies to provide a full description of their plans and to put them to a shareholder vote at their annual meetings. The association has set four conditions for supporting any poison pill, but those standards still leave the PFA with significant discretion that may invite corporate lobbying:

– Management must provide “adequate explanation” of how the defense would be “useful” in boosting long-term shareholder value.
– The firm must seek advance shareholder approval of the pill plan’s details.
– The pill plan must clearly spell out what would actually trigger the action to dilute a raider’s position, as well as conditions that would preclude such action, “such as oversight by a committee of non-executive directors.”
– Any plan must have a two- to three-year sunset provision.

In addition, the PFA said it will “in principle oppose” these other defensive proposals by management:

– Issuance of “golden shares” (a share class with veto power over major company policies), shares with multiple voting rights, or any “dead hand” takeover defenses.

– Increases in authorized shares outstanding, or changes to the bylaws giving the board discretion to move the record date for the right to vote at shareholder meetings. However, the PFA said it would consider voting for these resolutions if management provides an “adequate explanation” that the changes would not be used as a takeover defense.

The PFA is also opposing article changes that would make it more difficult for shareholders to oust directors. Japan’s Company Law was recently amended to allow shareholders to oust a director by a simple majority. However, companies may alter their bylaws to restore the two-thirds requirement that applied before April. There have been four such proposals this year–at Senshu Electric, SBS Co., Internet service provider GMO Internet and network equipment manufacturer Allied Telesis Holdings–as well as 11 such bylaw changes in late 2005.