Looking through the wrong end of the telescope: the Japanese judicial response to steel partners, Murakami, and Horie.

• Author: Givens, Stephen
• Position: Bulldog Sauce case, Yoshiaki Murakami and Takafumi Horie - Symposium: Decision Making on the Japanese Supreme Court

OVERVIEW: POISON PILL DOCTRINE IN SEARCH OF A PHILOSOPHY

When the Bulldog Sauce case (1) landed at the doorstep of the Japanese Supreme Court in July 2007, one suspects that the Court greeted it with all the enthusiasm of a homeowner who opens the front door to collect the morning paper, only to find waiting a basket full of orphaned kittens.

Unusually for a Japanese Supreme Court case, the Bulldog Sauce case attracted intense public scrutiny as an emblem of the struggle between a controversial new breed of corporate raider and the Japanese corporate establishment. But beyond that, in ways too subtle for headline news, the two lower courts arrived at the same destination through two entirely different paths of judicial reasoning, each of which presented its own set of awkward problems. The issues and the posture of the case were such that the Supreme Court could not easily resolve the split between the lower courts simply by endorsing one line of reasoning and rejecting the other.

How the Supreme Court resolved the Bulldog Sauce case, and the Japanese judicial response to the new breed of raider generally, reveals a great deal about the way the courts, and the Supreme Court in particular, think and function within the larger political and policy-making process. The inconsistent tangle of doctrines thrown up by the lower courts in the Bulldog Sauce case was the culmination of over two years of judicial efforts to accommodate defensive techniques against the new breed of corporate raider. The Japanese courts absorbed the consensus that something had to be done about the raiders and actively cooperated, judicially revising existing law and doctrine so as to overcome obstacles standing in the way of defensive techniques--in particular, poison pill-- like stratagems. in doing so, however, they jumped straight from the premise that "something had to be done" to tinkering with specific statutory provisions that stood in the way, without pausing to factor in the real-world commercial context of different varieties of defensive techniques or the larger policies served by the legal "obstacles" they sought to overcome.

Examing legal problems through the wrong end of the telescope is not a phenomenon confined to the Japanese judiciary. it is endemic to Japanese legal education itself, which, unlike American legal education, focuses on mastering discrete statutes and rules in isolation and as given, rather than thinking about whether the rules make sense. it is reflected in a national landscape of rules mysteriously divided into a minefield of petty rules and regulations unimaginatively administered by officialdom, on the one hand, and another class of rules--such as those governing gambling, prostitution, and other underworld activities--that are conveniently ignored or evaded by painfully artificial fictions, on the other. The same root mentality is reflected in Japanese legal scholarship generally, which typically consists of low-to-the-ground summaries of existing law and scholarship without a transcending thesis. To take another field, Japanese politics in general are non-ideological and unprincipled, more defined by faction and relationships than principle or ideology. Socratic debate, principled argument and dissent, and elegant intellectual distinctions--this is not how Japan expresses itself.

As the judges in the Bulldog Sauce case experienced, interpreting and applying law low to the ground, case by case, without a broader policy perspective, is like cutting someone's hair up close without stepping back to survey the results. You cut the hair too short here, and too long there, and have to keep circling back to correct earlier miscuttings. The doctrinal twists and turns the law of poison pills has taken are largely attributable to the failure of Japanese courts to step back and address the issues more honestly and from a wider perspective.

The courts confronting defensive techniques thrown up to thwart the raiders viewed the problem as a narrow one, pegged to two specific provisions of the Company Law: (1) Article 247 of the Company Law, (2) which, as interpreted by a long and consistent line of precedent, prohibited management from issuing stock or stock rights to try to influence a control contest, and (2) Article 109 of the Company Law, (3) which codifies the long-standing case law principle that shareholders of the same class be treated on a nondiscriminatory basis. Poison pills and related defensive techniques that involve the issuance of stock or warrants on a discriminatory basis--as between the unwanted bidder and the remaining shareholders--bring directly into play both of these statutory provisions, as well as the policies which presumably lie behind them.

From the beginning, the Japanese courts focused narrowly on Article 109 and Article 247, each viewed as a separate and discrete problem, and sought to fashion new doctrines built around the statutory provisions that would accommodate what they understood to be the "Japanese poison pill." The issue was defined at the threshold as one involving the legality of a "discriminatory issuance of warrants." So framed, the courts could see no relevant distinction between a typical poison pill, designed to give management leverage to negotiate better terms with a bidder, and the Bulldog Sauce warrants, which had the entirely different effect of forcing Steel Partners to cash out shares it already owned and expelling it as a shareholder. Since both took the form of a "discriminatory issuance of warrants," they were treated as indistinguishable. Similarly, because the problems were analyzed through the narrow prism of discrete statutes, rather than broader policies, the courts had no answer to the legality of other defensive techniques that did not involve the issuance of stock rights or were not overtly "discriminatory." Lacking a philosophy or a policy framework to analyze defensive techniques in corporate control contests, the courts were like the blind men stroking the trunk, ears, and other appendages of the elephant.

One might infer that the Supreme Court felt that the new (and inconsistent) corporate law doctrines declared by the two lower courts were not only extreme in a substantive corporate law sense, but that the herky-jerky judicial process that generated the doctrines was itself suspect. By the time the case reached the Supreme Court, it was too late to unscramble and relitigate the issues. The Supreme Court accepted the categories it inherited from the lower courts, but manipulated the same abstract doctrines and verbal formulas in a way that essentially declawed the decision. Thanks to the Supreme Court's deft surgery, as a corporate law decision, and in particular a guiding precedent on the Japanese poison pill, Bulldog Sauce ends not with a bang, but a whimper. if it has anything to say, it is limited to the exceptional facts of the Bulldog Sauce case itself, which are unlikely to recur.

The Bulldog Sauce case itself ended harmlessly, if not pointlessly, but as i will argue in the final section of this essay, the judicial mentality that drove its decision is not always harmless. Judicial accommodation of prevailing consensus is harmless so long as the consensus it reflects is benign. But, as the collective overreaction to the new breed of raiders shows, the shifting tides of consensus can take the form of a collective rush to judgment against which courts should serve as an autonomous check. The Japanese courts uncritically accepted the prevailing official consensus that the new breed of raider was a malignant influence. The courts were shamefully complicit with the national prosecutors in applying the criminal laws without a full comprehension of the relevant commercial context to convict Yoshiaki Murakami and Takafumi Horie, the highest-profile domestic raiders, and put them out of business. in a criminal context, the courts applied rules mechanically without pausing to think or explain what was offensively criminal about what the defendants actually did or who had actually been harmed.

1. Article 247: Misdigested Delaware Jurisprudence

   1. Legal Obstacle to the Poison Pill

      Article 247 of the Company Law authorizes injunctions against the issuance of stock warrants "when the issuance of the warrants is to be conducted in a materially unfair manner." (4) By its terms, Article 247 applies to the issuance of stock rights and not other forms of transactions that could be used to impede a bid for control. A fairly consistent line of cases, as well as the accepted academic view, has held that the issuance of stock rights, the "primary purpose" of which was to influence or impede a bid for control, was "materially unfair" and therefore enjoinable. (5) Article 247 had been successfully invoked when management of target companies tried to block a change of control to an unwanted bidder by issuing share rights to a friendly third party--the method Japanese companies have typically used to defend themselves against unsolicited bids. (6)

      The policy behind this case law, though not elaborately spelled out in the cases, was fairly straightforward. Management should stay out of voluntary transfers of shares between and among shareholders. Shareholders are competent to look out for themselves. The securities markets generally work efficiently, and changes in control generally promote economic efficiency. Management's motives for wanting to block a bid are suspect to the extent that they stand to lose their jobs if a change in control does take place.

      These policy assumptions reflect liberal, free-market ideas about shareholder competence, market efficiency, and the risks of management self-dealing. it is consistent with the basic policy assumptions, for example, of Delaware corporation law and Delaware jurisprudence relating to corporate control contests. (7)

      The Japanese establishment's interest in Article 247 and mergers and acquisitions (M&A)...