February 23, 2009

Japanese Investors Step Up Opposition to Pills

Recently, RiskMetrics reported in its “Corporate Governance Blog”: Corporate Japan may have a tougher time deploying “poison pills” as investor opposition to such defenses mounts. In the latest signal that financial market participants have grown wary of the use of pills, shareholders of the Japanese payroll management company Works Applications were able to halt management efforts to install the defense. In September, the company became the first known to RiskMetrics Group to drop a poison pill takeover defense plan from its annual meeting agenda, acknowledging that votes posted in advance of the meeting had “fallen well short of anticipated support” for the measure.

Notably, the company has just 15 percent foreign ownership, underscoring that domestic institutions are joining their foreign counterparts in opposing takeover defenses. Works Applications’ recent retreat received scant media attention in Japan beyond a brief article on Sept. 23 in the Nihon Keizai Shimbun business daily. According to the article, management told shareholders at the company’s Sept. 24 annual meeting that it had decided not to seek renewal of the plan in view of the paucity of shareholder support. According to a statement released on the eve of the meeting, the company said it had “concluded that more careful study of the proposal content [was] required, and that it was resolved to delete these items from [the] annual meeting agenda.”

The move may be the latest manifestation of the growing pushback to the rising prevalence of pills at Japanese companies. According to RiskMetrics data, more than 500 Japanese firms have adopted the defense since 2005 when legal experts deemed the defense to be legitimate under Japanese corporate law.

But by August 2007, Japan’s Ministry of Economy, Trade, and Industry began to publicly voice concerns over the use of pills. In its annual white paper on economic and finance issues, the agency noted “hostile takeovers can boost productivity and corporate value by removing inefficient executives and improving management (the efficiency effect on management).”

The ministry’s pronouncement, coupled with increasing skepticism of pill usage from Japan’s business press and officials at the Tokyo Stock Exchange, has decidedly altered views on defenses and helped dampen a feared explosion of poison pill adoptions during Japan’s 2008 annual meeting season. Although shareholder approval is increasingly treated as a prerequisite, if not legal requirement, for pill deployments, the example of Works Applications would suggest that pill adoptions will decline heading into 2009, and firms may be increasingly reluctant to seek pill renewals.

Implementing the New Cross-Border Rules

We just posted the transcript for our recent webcast: “Implementing the New Cross-Border Rules.”