Japanese Minority Shareholder Cash Out Transactions — Supreme Court Decision on Share Price (Jones Day Tokyo)

On July 1, 2016, the Supreme Court (first petty bench) issued a decision (the “Decision”) that may have a material impact on Japanese M&A practice.
The Decision involves the determination of the price for callable shares (zembu shutoku joko tsuki shurui kabushiki) redeemed by a target company to cash out minority shareholders after a tender offer by an acquirer.

Culture by Design – Interview with Sir Win Bischoff on Corporate Culture

Below is an insightful interview with Sir Win Bischoff, Chairman of the Financial Reporting Council and formerly Chairman at Lloyds Bank. He speaks to  Alexandra Jones, Editor of the Governance and Compliance Magazine on corporate culture and shares his experience on how a strong culture helped him lead Lloyds through the financial crisis. He explains how by its very nature , culture is not short term but much longer than a strategy of a business model.

He further shares his view on the responsibilities of management and the board, in terms of establishing the right culture and how long it takes to change a bad culture, among others.

The Future of Asset Management, by Jeroen van Oerle and Patrick Lemmens

Executive Summary:

 During the past decade, the asset management industry was mostly occupied with regulatory changes dictating costly compliance procedures. The increase in regulatory burden was mainly felt by small asset management firms. In addition to increased regulatory costs, fee pressure has had a large impact on the industry as well.

In the coming years we believe these two forces will remain top of mind, but they have different drivers now. Technology has entered the asset management industry. This will add costs because asset managers have to live up to ever-increasing customer demands regarding immediacy, connectivity and ubiquity. At the same time, this leads to an increase in fee pressure due to growing transparency, comparability and competition from nonfinancial companies. We think the asset management pie is still growing strongly, but not everyone is invited to take a piece.

“The Rise of Indices Is Changing the Face of Investing”, by Angana Jacob and Sunjiv Mainie, CFA


A confluence of factors including technology, regulation, investor skepticism of manager skill, and fee-consciousness, has favored the rise of index investing. The pace of growth and complexity of change make it difficult for investors and managers to stay informed about these critical trends. In this report, we provide an overview of the rise of indexing, as well as its impact, both realized and potential, on the asset management industry.

The first half of the paper outlines the key trends in indexing and fund management, specifically:

1. Fees are under pressure. Changes in technology and economies of scale have helped commoditize beta;

2. Product scope is continually broadening, with index-based investing making inroads into active management. Smart beta and the growing interest in hedge fund beta paves the way for further growth of passive index funds at the expense of active management; and

3. Technology advances allow for mass customization and an increased focus on outcomes. The outcomes required by individual and institutional market participants are becoming critical—index funds may benefit due to their low cost and heightened transparency.

9/26 – Seminar in Chicago: “The Vital Role of Director Training in Japan’s Corporate Governance Reforms”

The Board Director Training Institute of Japan (BDTI) is a government-certified nonprofit providing one-day “director training” courses in English and Japanese, and governance-related seminars and e-learning courses. These programs teach participants key knowledge needed to serve on, report to, or analyze boards in Japan.

What topics are covered by such programs, and why? What issues surround the introduction of director training, or governance training, in the case of Japan? Why is training believed to be utterly essential to the success of Japan’s corporate governance reforms? What is the best approach – who needs to betrained, how? Why is the potential upside for Japan’s economy big?

In this seminar event, the proposer of Japan’s Corporate Governance Code will answer these questions, using the binders and documents that are actually used in BDTI’s English course. The program will kick off with lunch at 12:oo noon. Starting about 4:00 pm until 6:00 pm, the lecturer will lead interactive discussion about what the reforms mean from an investor’s perspective, what changes and debates are taking place “behind the scenes” in Japanese companies now, and what sort of tactics for investment and engagement with Japanese companies are likely to be most effective.

”The Rise of the Independent Director: A Historical and Comparative Perspective” by Harald Baum

Abstract:  The paper provides a historical analysis of the rise of the independent director in the US and the UK. These two jurisdictions are commonly credited with creating the concept of the independent director and exporting it around the world. In the first half of the twentieth century, a managerialist model of corporate governance dominated in the US. Inside directors, chosen and controlled by the CEO, dominated corporate boards. The concept of the independent director and the related model of the ‘monitoring board’ appeared only in the 1970s. Two watershed events sparked this dramatic change: First, the sudden collapse of the major railway company Penn Central in 1970; and second, Eisenberg’s influential book ‘The Structure of the Corporation’, published in 1976. According to Eisenberg, the board’s essential function was to monitor the company’s management by being independent from it. Today the reliance on independent directors as a panacea for various corporate governance ills has reached its zenith in the US. As in the US, the typical British board of the 1950s was an advisory board dominated by insiders. It was only in the 1990s, with the beginning of the British corporate governance movement subsequent to the publication of the Cadbury Report, that the concept of independent directors was embraced in the UK. Since the early 2000s independent directors have dominated on the boards of listed companies. From the UK, the concept of the independent director started to conquer the European Union as a fundamental corporate governance principle. The European Model Company Act of 2015 and, on the supra-national level, the OECD Principles of Corporate Governance of 2015 recommend assigning important tasks to independent board members. The empirical support for staffing boards with independent directors, however, remains surprisingly shaky given the ubiquitous reliance on independent directors. The global financial crisis of 2008 has added further doubts.

Read full research paper here. 

”Boards in Europe – Accountability and Convergence” by Paul L. Davies Klaus J. Hopt

Abstract: Corporate boards play a central role in corporate governance and therefore are regulated in the corporate law and corporate governance codes of all industrialized countries. Yet while there is a common core of rules on the boards, considerable differences remain, not only in detail, but sometimes also as to main issues. These differences depend partly on shareholder structure (dispersed or blockholding), partly on path dependent historical, political and social developments, especially employee representation on the board. More recently, in particular with the rise of the international corporate governance code movement there is a clear tendency towards convergence, at least in terms of the formal provisions of the codes. This article analyses the corporate boards, their regulation in law and codes and their actual functioning in nine European countries (Belgium, France, Germany, Italy, the Netherlands, Poland, Sweden, Switzerland and the United Kingdom) in a functional and comparative method. Issues dealt with are inter alia board structure, composition and functioning (one tier v. two tier, independent directors, expertise and diversity, separating the chair and the CEO functions, information streams, committees, voting and employee representation) and enforcement by liability rules (in particular conflicts of interest), incentive structures (remuneration) and shareholder activism. The article finds convergence in these European countries due to the pressures of competition, a pro-shareholder change supported by government and institutional investors and, to a certain degree, the impact of the EU. This convergence shows more in the codes and the ensuing practice than in the statutes. On the other side considerable differences remain, in particular as a result of the failure to adopt a mandatory „no frustration“ rule for takeovers at EU level and diverging systems of labor codetermination. The result is an unstable balance between convergence and divergence, shareholder and stakeholder influence and European v. national rulemaking.

Read full working paper here.

”Insurance Is a Better Buffer Against Crises than Cross-shareholdings”

According to this recently-published discussion paper by the Foreign Non-Life Insurance Association of Japan, risk management provides a better barrier against crises than maintaining cross-shareholdings with friendly firms. The paper puts corporate governance in the wider context of economic growth and security and highlights the fact that management of Japanese companies is often not organized so as to to use risk management solutions that can be provided by insurance. An example mentioned is that only  around 17% of the losses from the 2011 Eastern Japan earthquake were recoverable by insurance, as compared with 75% recovery in the case of the Christchurch, New Zealand earthquake the same year.

The paper proposes supporting stronger corporate governance, fostering a culture of risk management and leveraging best industry practices.

Read the discussion paper here.

Source: Foreign Non-Life Insurance Association of Japan Inc.

‘Discussion Between Two Outside Directors in Japan’

Increasing the number of outside directors, and fully using what they can contribute, is one of the areas emphasized by Corporate Governance Code introduced in Japan more than a year ago.  Below is an insightful discussion between two outside Directors , Mr. Yoshiaki Ozawa and Mr. Noboru Kashiwagi at Daifuku, who share their views.

Read the discussion here.

”Will better corporate governance boost Japanese equity returns?”

Despite the fact that many folks are still pessimistic as to whether corporate governance reforms will bring a surmountable positive change to the Japanese economy, there has been some notable changes as the writer of this article, Louise Dudley, Hermes Global Equities Portfolio Manager, below puts it. It will take time and patience but will be worth it in the end.