Bull-Dog Sauce for the Japanese soul? Courts, corporations, and communities - a comment on Haley's view of Japanese law.

• Date: 22 March 2009
• Published date: 22 March 2009
• Author: Milhaupt, Curtis J.
• Author: Milhaupt, Curtis J.

INTRODUCTION

A few years ago, in the immediate aftermath of Livedoor's sensational bid for Nippon Broadcasting Corp. and the promulgation of governmental guidelines on hostile takeovers permitting the use of a poison pill defense, I published In the Shadow of Delaware? The Rise of Hostile Takeovers in Japan ("Delaware's Shadow"). (1) In it, I drew parallels between legal and market developments in the 1980s in the United States (more specifically, in Delaware, the legal home of most large public companies in the United States) and similar developments in Japan in the 2000s.

In the three and a half years since that essay was published, events in Japan have continued to unfold in interesting ways. Although unsolicited bids in Japan have not become commonplace, they are no longer as rare as a sighting of Haley's Comet. (2) There have been about ten hostile bids in the post-Livedoor period from late 2005 to the end of 2007. There has been an explosion of interest in takeover defenses, and today about four hundred publicly traded Japanese firms have adopted some form of shareholder rights plan, although from an American perspective most of the plans have taken a highly unusual form. Japanese courts have decided several more cases arising out of contests for corporate control, laying the foundation--as yet uneven and incomplete--for a Japanese takeover doctrine. One of these cases, Steel Partners Japan Strategic Fund (Offshore), L.P. v. Bull-Dog Sauce Co. (3) ("Bull-Dog Sauce"), contains a rather startling ruling from the Tokyo High Court which, if widely adopted by the judiciary, could have a profound and probably stifling impact on the market for corporate control in Japan.

These developments are timely for a celebration of John Haley's career. One of Haley's important contributions to our understanding of Japanese law is his claim that a communitarian ethos permeates the formation of law in Japan, particularly in the hands of the courts. Commentators have long described the Japanese firm in communitarian terms. Recall Ronald Dore's "employee-favoring" Japanese firm (4) or Zenichi Shishido's depiction of the Japanese "Company Community." (5) The rise of hostile takeovers in Japan poses big challenges for the Japanese firm in its postwar incarnation. A robust takeover market--even one that stopped well short of U.S. volumes of activity--would put tremendous pressure on the facets of Japanese corporate governance most closely associated with communitarian ethos, such as expectations of long-term employment, smooth inter-generational transitions in top management, and relatively stable linkages between the firm and its key providers of capital and other inputs. (6)

With this tension between the community and market-favoring aspects of current Japanese corporate governance in mind, and in preparation for this celebration of Haley's work, I reread The Spirit of Japanese Law. (7) The final passage states:

The defining pattern for Japanese law, during the course of the twentieth century, has been its communitarian orientation. How enduring will be this emphasis can only be guessed at. To what extent it will continue into the next century is open to question.... Change through learning from the West, concern for individual autonomy, and the views of scholars are also predominant features of the spirit of Japanese law. During the next century, perhaps their combined influence, along with economic imperatives, will produce another transforming change.... More certain is the proposition that Japanese judges will shoulder a large share of the responsibility for whatever change may come through law. They cannot evade or shift it to others. Within law's domain they will have the last word. (8) Significantly, although Haley focuses on the courts, he recognizes that the entire lawmaking production process in Japan gives life to this community-favoring spirit. He writes, "[t]he ways in which legal rules are made, enforced, interpreted, and applied not only reflect Japan's communitarian emphasis but also contribute to its endurance in face [sic] of inexorably eroding influences." (9) As we will see, this is an insightful perspective on the formation of takeover law and policy in Japan.

In this short Essay, I take stock of the recent hostile takeover developments in Japan with an eye toward Haley's conception of Japanese law and its trajectory into the future. Part I briefly outlines my major arguments in the previous essay. Readers familiar with that work can fast-forward to Part II, which examines post-Livedoor developments. Part III takes stock of these developments in light of Haley's ideas about the animating principle of law and the role of the courts in twentieth-century Japan. I conclude that Haley's perspective is very helpful in understanding how the judiciary has responded to legal issues arising out of takeover bids thus far. But an examination of how the courts wound up with this issue and how they have resolved it to date sheds light on some potentially negative consequences and limitations of this approach, particularly as the Japanese economy and society become more heterogeneous.

1. LIVEDOOR AND THE TAKEOVER GUIDELINES

   In extremely brief overview, Delaware's Shadow depicted a Japanese system of corporate governance in flux, buffeted by both external and internal forces. When markets changed in the 1990s, corporate law that was formerly irrelevant or complementary to postwar Japanese economic institutions became problematic. Dissatisfied with the constraints imposed by law, market participants responded as they did in the United States two decades earlier: by pursuing legal strategies, adapting to governance or incentive structures outside the legal system, and making use of the new environment to push the edges of "acceptable" market conduct. These actions thrust novel transactions into the realm of contemplation and, in turn, raised new questions for the legal system to answer. Many of the parallels between Delaware in the 1980s and Japan in the 2000s are striking. In both systems, market and legal changes reverberated through the political economy, transforming existing corporate governance institutions and catalyzing further development of the corporate law. In contrast to developments in the United States, however, these changes in Japan involved large-scale transplantation of foreign legal technologies and standards, while market forces have remained far more muted than in the United States.

   For Japan, the rise of hostile takeovers presages further acceleration in the reconfiguration of its postwar economic system, with major implications for its legal system as well. Delaware's Shadow ventured the (relatively safe) prediction that the judiciary would take on a higher profile as arbiters of market conflict as a result of the spike in takeover activity. (10) Indeed, as the Livedoor episode shows, the rise in hostile takeover activity in Japan beginning in the 2000s brought the Japanese judiciary into much closer contact with a central issue posed by any takeover: who decides whether control over corporate assets will be transferred?

   1. Livedoor

      The first and most dramatic illustration of this new trend is the Livedoor bid for Nippon Broadcasting System ("NBS") in 2005. Since that transaction is fully described in Delaware's Shadow, (11) I will focus exclusively on the judicial decision, rendered in response to the bidder's (Livedoor's) request for an injunction to prevent incumbent management of the target (NBS) from issuing a block of warrants to its de facto parent company. Exercise of the warrants would have dramatically diluted Livedoor's holdings in NBS.

      The Tokyo High Court affirmed the District Court's decision to enjoin the warrant issuance as "grossly unfair," enunciating the following rule:

      In principle, where a contest for corporate control has emerged, it constitutes a grossly unfair issuance (Commercial Code §280-39(4); §280-10) to issue warrants, the primary purpose of which is for existing management or a specific shareholder who exercises influence over management to retain control, by diluting the holdings of another shareholder. However, ... where the hostile bidder (1) intends to make a target company or its affiliates repurchase the shares for a premium after the stock price increases (is engaged in greenmail); (2) intends to transfer intellectual property, know how, corporate secrets, key business transactions or customers, which are vital for the management of the company, to the bidder or its affiliates (is engaged in "scorched earth" policies); (3) has acquired the target company's shares so that after acquiring control, the bidder can liquidate assets to secure or pay off bidder's debts or those of related companies; or (4) obtains temporary control of...