The Tokyo High Court’s ruling earlier this month to uphold a lower court decision on M&A fair-value appraisal in favour of FamilyMart‘s minority shareholders is likely to have long-lasting implications on future shareholder litigation in Japan.

Activist shareholders and lawyers point out the ruling comes as corporate Japan is shaking from a qualitative change in the way independent directors in M&A targets approach negotiations, particularly with non-arms length buyers. Special committees have stepped up the level of rigour with which they scrutinize tender-offer prices and deal processes and are placing an increased focus on shareholder value, they say.

This is, in large part, due to the introduction of the Fair M&A Guidelines by the Ministry of Economy, Trade and Industry (METI) in 2019, which places heavy emphasis on the role of special committees.

“Special committees play a key role in the guidelines. And they are expected to exert the utmost effort to maximize the benefit of minority shareholders,” said a METI official.

These corporate governance tailwinds did not exist over a decade ago when minority shareholder hopes were raised by a Japanese Supreme Court decision that suggested they were set to receive fair treatment in subsequent related party M&A transactions. In 2009, some 120 Rex Holdings minority shareholders won a three-year battle against Rex Holdings when the Court asked the Japanese restaurant chain to raise its MBO squeeze-out price to JPY 336,966 per share from the original offer price of JPY 230,000.

The ruling sparked a frenzy of MBO appraisal court filings by minority shareholders aggrieved at perceived low-ball buyout offers. But then came the JCOM/KDDI ruling in 2016. The Supreme Court said the squeeze-out price should be the same as the offer price because the offer was made under a ‘fair process’. And therefore, the evaluation of a squeeze-out price is beyond the discretion of a court.

At the time, many lawyers expressed concern that the court blindly assumed that the process of deciding the squeeze-out price was fair. The JCOM ruling was a blow to minority shareholders who had been counting on judicial processes to seek better squeeze-out prices. “The court has put its own convenience first over pursuing justice,” a Japanese activist investor lamented at the time.

But this month’s 1 November, Tokyo High Court ruling comes amid a different environment for M&A in Japan, as this news service has repeatedly reported.

The Tokyo High Court ruled that the fair value for the convenience store chain’s shares was JPY 2,600, which is 13% higher than Itochu’s [TYO:8001] JPY 2,300 per share buyout offer in 2020. The decision upheld the lower court’s decision on 23 March last year.

The court’s decision was in line with what FamilyMart shareholders had petitioned for – JPY 300 p/s more than the offer from the Japanese trading house.

The decision was welcomed by Oasis Management and RMB Capital, the activist shareholders who pursued a fair value appraisal and criticized Itochu for not paying enough in its 2020 tender offer.

“The Tokyo High Court confirmed that the parent company (Itochu), through its controlled company (FamilyMart), did not meet the standard of fairness,” said Seth Fischer, chief investment officer of Oasis.

“Far too often, M&A transactions in Japan prioritize the interests of parent companies or majority shareholders at the expense of minority shareholders. We hope this decision paves the way for a fairer approach for all M&A,” he added.

FamilyMart takes its fight higher

A FamilyMart spokesperson said that subsequent to the high court decision, the convenience store operator on 5 November took its fight with the funds to Japan’s Supreme Court.

“Unlike the Tokyo District Court’s decision, we welcome the fact that the Tokyo High Court admitted that our special committee made some efforts to negotiate on behalf of general shareholders. But it is truly regrettable that the court did not accept our argument in the end. We will continue to insist that the tender offer price was reasonable,” the spokesperson said.

In March 2023, the Tokyo regional court ruled that a special committee set up by FamilyMart “did not fulfil its role adequately as an organization independent of FamilyMart and Itochu”. The Tokyo High Court used milder language regarding the role of the special committee. It said the committee did carry out negotiations and made judgements based on opinions collected from advisors in a timely and appropriate manner.

In negotiation with Itochu, the special committee initially insisted that a tender offer price should be JPY 2,800 p/s, which was JPY 500 higher than the parent company’s offer price. The committee also insisted that the price should not be below the lower limit of the DCF range (JPY 2,472) set by its own advisor and the scheme had to have an MoM (majority of minority shareholders) condition.

However, when confronted by the parent company’s opposition, FamilyMart’s special committee abandoned these demands and agreed to Itochu’s JPY 2,300 p/s offer price without sufficient consideration, the ruling said.

Mikiharu Mori, a Tokyo-based M&A lawyer, said that thanks to the FamilyMart court rulings, “We have been witnessing an increasing number of cases in which a special committee has negotiated a tender-offer price multiple times with a target company.”

For example, in August 2023, Osaka-based building materials maker Daiken rejected Itochu’s tender offer proposals five times and negotiated the buyer up from JPY 2,450 p/s to JPY 3,000 p/s. The agreement included a requirement that the minimum number of shares to be purchased in the tender offer was equivalent to a ‘Majority of Minority’ condition. The agreed price fell within the DCF ranges estimated by both the bidder and the target’s financial advisors reviewing the deal.

At the same time, Itochu also faced resistance from its information processing subsidiary Itochu Techno-Solutions. The subsidiary, known as CTC, also rejected Itochu’s proposal five times starting with the first proposal of JPY 3,800 before settling at JPY 4,325, which was also within the DCF ranges estimated by both the bidder and target’s financial advisors.

Itochu, however, refused to accept CTC’s request to include an effective Majority of Minority condition through the minimum acceptance level. Instead, the bidder proposed to introduce a number of other conditions aimed at ensuring the fairness of the offer price.

Furthermore, in October, this year, sportswear maker Descente rejected Itochu’s proposals for a tender-offer price seven times, starting with its first proposal of JPY 3,600 and finally accepting the eighth proposal of JPY 4,350 p/s.

Clearly, these special committees were conscious of the FamilyMart court rulings, according to Mori.

DCF limits & MoM conditions

There has been an increasing tendency for a special committee to insist that the tender-offer price should not be below the lower limit of the DCF range and that the offering scheme has to have an MoM (approval by a majority of minority shareholders) condition, said Mori.

Another Tokyo-based governance lawyer agreed, adding that “Itochu clearly has learnt lessons from the FamilyMart rulings.”

Asked whether Itochu’s approaches to recent buy-out negotiations have changed as a result of the rulings, an Itochu spokesperson said the company has not changed anything in particular. “We made decisions and responded to each case,” said the spokesperson.

“As stated in METI’s Fair M&A Guidelines, the fair conduct of MBOs and acquisitions of a controlled company by the controlling shareholder is crucial for raising confidence in Japanese capital market,” said Oasis’s Fischer.