"Triangular Cross-Border Mergers will Boost Japanese Economy," says European Commission
2006/11/16
EU NEWS 102/2006
16 November 2006
The European Commission supports Prime Minister Abe's goal to double Foreign Direct Investment (FDI) to 5% of GDP by 2011. FDI is not only important for the capital inflow it creates into an economy, it is also important for obtaining technology, attracting innovative management and for enhancing the competitive edge of Japanese companies, which often operate on the world market. Cross-border mergers are an important tool for enhancing inward FDI. From May 2007 triangular cross-border mergers will be allowed in Japan (Triangular merger: a foreign company merges with a Japanese company via a Japanese subsidiary of the foreign company.) The European Commission sees this as a positive step to creating a better investment climate.
While triangular mergers are not the easiest way of conducting cross-border mergers, the European Commission welcomes Japan's efforts to increase inward FDI. In EU Member States cross-border mergers (also with non-EU countries) are usually conducted via a direct exchange of shares, since this does not require the foreign company to go through a local subsidiary for the purpose of conducting a merger. In short there are hardly any obstacles on the EU side to Japanese companies investing in the EU through mergers and acquisitions, and it is less complicated than the triangular merger.
For EU companies, being able to conclude triangular mergers should nevertheless make it easier to invest in the Japanese economy. However, the European Commission strongly believes that this scheme will only work efficiently if it is free from restrictions. Recent newspaper reports have suggested that certain parts of the Japanese industry are calling for more stringent rules on the triangular merger scheme in order to protect minority shareholders, such as requiring 'extraordinary resolution' (tokushu ketsugi) for non-listed companies (which is the majority of foreign companies). This means that for approval of a merger, a 2/3 majority of outstanding voting shares and, in addition, a simple majority by headcount is necessary. The extra requirement of a simple majority by headcount will make the likelihood of approval by the shareholders' meeting virtually impossible. It would merely make the triangular merger scheme unworkable in the cross-border context.
The result of this would be that Japan will continue to lag behind the global practice regarding cross-border M&A: the EU and the US already provide for efficient cross-border M&A schemes. Putting restrictions on Japan's only available cross-border merger scheme using exchanges of shares will not make Japan link up with this global approach. At the same time, the European Commission understands concerns regarding the protection of minority shareholders in hostile takeover bids. In the EU, while having a generally liberal M&A climate, the Directive on takeover bids protects minority shareholders for example by regulating that a ‘fair price’ (either in shares or cash) has to be paid to minority shareholders in case of a hostile takeover. We understand that in Japan, if a shareholder does not agree with a merger, he can as an alternative apply for cash to be remitted instead of shares. This shows that there are other ways to protect minority shareholders without limiting the possibility to use the triangular merger scheme.
To illustrate the level of cross-border mergers in Japan compared to that of the EU and the US, the value of cross-border mergers (sales) in Japan amounted to US$2,512 million in 2005, while it was US$429,146 million in the EU and US$105,560 million in the US. The value of cross-border mergers in the EU is thus 170 times higher, and in the US 42 times higher than in Japan.
In 2005 Japan’s cumulative FDI stock accounted for only 2.2% of GDP, compared with 33.5% for the EU, 14.3% for China and 13.0% for the US. If Japan is serious about increasing FDI, Japan should provide for an effective cross-border merger scheme. The European Commission believes that a workable triangular merger scheme would benefit the Japanese economy.
For further details, please contact:
Silvia Kofler Tel: 03-3239-0461Silvia.Kofler@ec.europa.eu
Mari Koseki Tel: 03-3239-0464Mari.Koseki@ec.europa.eu
Miwako Suetsune Tel: 03-3239-0430Miwako.Suetsune@ec.europa.eu
