On May 15, 2024, the Japanese Diet enacted a bill to amend the Financial Instruments and Exchange Act and other related laws, which includes, among others, the following amendments to the rules concerning mandatory tender offers to ensure transparency and fairness in the capital market:
1. Lowered Threshold (30%)
The well-known threshold for mandatory tender offers, which is currently one-third (1/3) of the shareholding ratio, will be adjusted to 30%. While previously mandatory tender offer requirement was triggered based on ownership of one-third or more of the total issued shares of the target company, as this shareholding ratio allows the veto power against a special resolution (i.e., a resolution that must be passed by a majority of two-thirds or more of the total voting rights) at general shareholders' meetings, the focus has now shifted to practical veto power, in consideration of the tender offer rules in other countries and the ratio of voting rights actual exercised in Japanese companies. With this amendment, mandatory tender offer requirement will be triggered upon acquisition of more than 30%, instead of one-third, of the issued shares of the target company (or in the case the acquirer already owns more than 30% of the issued shares of the target company, any additional acquisition) for transactions such as off-market trades and acquisitions via ToSTNeT.
2. Applicability to Market Trades (On-Floor Transactions)
Mandatory tender offer rules will apply to market trades (on-floor transactions) exceeding 30% ownership unless they fall under exempted transactions. Previously, under the competitive trading principle of price/time priority, and the view that market trades (on-floor transactions) ensure transparency and fairness, mandatory tender offers were only enforced in limited scenarios. However, there has been growing advocacy for applying the tender offer rules to market trades (on-floor transactions), based on the reasoning that insufficient disclosure of information about accumulation of purchases made through market trades (on-floor transactions), including information on the amount, price, time, and period of the purchases, potentially exert significant selling pressure (in other words, "coercion") on shareholders. In light of such concern, market trades (on-floor transactions) exceeding 30% of ownership are included in the scope of transactions subject to mandatory tender offer rules under this amendment.
3. Abolishment of Rapid Accumulation Rule
The rule on rapid accumulation, which is one type of acquisition that triggers the mandatory tender offer requirement, will be abolished. With the establishment of the 30% rule that applies to market trades (on-floor transactions), the rapid accumulation rule is no longer deemed necessary.
These amendments are scheduled to come into effect within one year of the date of promulgation.
Originally published May 2024.
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