Business law essay
1 BUSL377 Week 9 CLASS ACTIVITY 1 This Class Activity is taken from a real case:
A = Fuji TV B = Nippon Broadcasting Systems, Inc. (NBS) The group is Fuji-Sankei Group L = Livedoor The series of events happened in 2005.
JUDGMENT (23/3/2005) The Tokyo High Court affirmed the decision of the Tokyo District Court and upheld the injunction. When there is a dispute on the management control of a company, there is a limit to the general authority of management judgment exercised by the Board of directors in their act of decreasing “the stock ratio of certain stockholder (who is attempting to gain control) by issuing new stocks for the main purpose of maintaining/securing control over management by a certain stockholder”.
In a dispute over the control of management of a company, new share warrants have been issued “for the main purpose of maintaining and securing the control over management by a certain stockholder who has actual influence and supports the existing management”. As a result, there is a decrease in the stock ratio of the stockholder who is attempting to gain control by hostile takeover. In principle, such issuance of new share warrants is an issuance of new share warrants by way of “a significantly unfair method”.
The court then went on to list out 4 examples of some special circumstances justifying the issuance of new share warrants to maintain control over company. One example is: when the purchaser, with no intention to participate in management of a company, is bidding for the shares simply to raise the stock price, “to make a target company or its affiliates repurchase the shares for a premium after the stock price increases”, the so-called green-mailers.
Source: Koji Murakami, “Livedoor Co./Nippon Broadcasting System Inc. – To prohibit the issue of new stock options (Tokyo High Court, March 23, 2005; Hanrei-jihō , No.1899, p.56)” (2006) Ritsumeikan Law Review , No.23, pp.106-109 (also available at: http://www.ritsumei.ac.jp/acd/cg/law/lex/rlr23/CASE.pdf).
Nippon Hōsō K.K. v. Livedoor K.K. (Tokyo High Court, March 23, 2005; 1173 Hanrei Taimuzu 125) (as excerpted and translated by Curtis J. Milhaupt) in Curtis J. Milhaupt, J. Mark Ramseyer and Mark D. West, The Japanese Legal System: Cases, Codes and Commentary , Foundation Press, 2006, pp.725-727. Kenichi Osugi, “Transplanting poison pills in foreign soil: Japan’s experiment” in Hideki Kanda, Kon-Sik Kim and Curtis J. Milhaupt (eds) Transforming Corporate Governance in East Asia (Routledge, 2008). 2 ----------------------------------------------------------------------------------------------------------------------- Subsequent Events ----------------------------------------------------------------------------------------- 24/3/2005 NBS lent to Softbank Investment Corp. (a venture capital company of the Softbank group) a stake of 13.88% in Fuji TV under a stock loan deal. Softbank became the largest shareholder of Fuji TV. 25/3/2005 Report submitted to the Ministry of Finance showed that Livedoor had slightly passed 50% of NBS shareholding as of late March 2005. 18/4/2005 Fuji TV and Livedoor reached a settlement agreement.
Terms of the agreement: 1. Fuji TV will purchase Livedoor’s entire stake in NBS and eventually making the latter a wholly owned subsidiary. (The price that Fuji TV will pay to Livedoor for each NBS share will be ￥ 350 higher than what it paid in its tender offer bid.) 2. Fuji TV will also purchase Livedoor shares to be issued by Livedoor through a third-party allotment scheme on 23 May and will become the second-largest shareholder of Livedoor. 3. Fuji TV, NBS and Livedoor shall discuss on a business alliance, including integration of the Internet and broadcasting services. ---------------------------------------------------------------------------------------------------------------------------------- 16 -17/1/2006 Prosecutors searc hed Livedoor headquarters on suspicion of securities law violation. 23/1/2006 Livedoor CEO T. Horie was arrested on suspected fraud. Subsequently, he was charged for securities and accounting fraud. 14/4/2006 Livedoor was de -listed . 16/3/2007 Horie was found guilty by the Tokyo District Court and was sentenced to 2 and half years in prison. July 2008 The District Court sentence was upheld by the Tokyo High Court. Horie appealed the case to the Supreme Court. April 2011 The Supreme Court upheld the sentence. Source:
Curtis J. Milhaupt, “In the shadow of Delaware? The rise of hostile takeovers in Japan” (2005) 105 Colum. L. Rev . 2171.
“Two more firms to back Fuji TV’s bid for NBS” The Japan Times , 1 March 2005, available online at http://www.japantimes.co.jp [accessed on 22 March 2005].
3 “Livedoor ups stake in broadcaster” The Japan Times , 5 March 2005, available online at the above-mentioned URL [accessed on 22 March 2005].
“Fuji TV seen securing one-third stake in NBS” The Japan Times , 8 March 2005, available online at the above-mentioned URL [accessed on 22 March 2005].
Takuya Karube “Injunction a landmark decision for capital market” The Japan Times , 12 March 2005, available online at the above-mentioned URL [accessed on 22 March 2005].
“High Court hears Livedoor-NBS case” The Japan Times , 19 March 2005, available online at the above-mentioned URL [accessed on 22 March 2005].
Mayumi Negishi and Taiga Uranaka “Tokyo High Court backs Livedoor’s takeover bid” The Japan Times , 24 March 2005, available online at the above-mentioned URL [accessed on 24 March 2005].
Mayumi Negishi “NBS loan of Fuji stake to Softbank unit parries Livedoor, for now” The Japan Times , 26 March 2005, available online at the above-mentioned URL [accessed on 27 March 2005].
“Fuji TV to continue talks with Livedoor” The Japan Times , 26 March 2005, available online at the above-mentioned URL [accessed on 27 March 2005].
“Livedoor certain to take control of NBS as stake tops 50%” The Japan Times , 2 April 2005, available online at the above-mentioned URL [accessed on 6 May 2005].
“Amicable alliance ‘not easy’: Livedoor, Fuji TV set to bury hatchet?” The Japan Times , 14 April 2005, available online at the above-mentioned URL [accessed on 6 May 2005].
“Fuji TV, Livedoor agree to bury hatchet, tie up: Broadcaster to spend some 147 billion yen to settle takeover fight with the Internet firm” The Japan Times , 19 April 2005, available online at the above-mentioned URL [accessed on 19 April 2005].
｢フジ、ライブドアが提携合意 ２ヵ月の買収攻防に幕｣ and ｢フジテレビジョン･ニッポン放送とライブ ドアの攻防｣ 朝日新聞 online at http://www.asahi.com [accessed on 19 April 2005]. Setsuko Kamiya and Kaho Shimizu, “A CEO in prison? About time, some say” The Japan Times , 17 March 2007, available online at the above-mentioned URL [accessed on 10 May 2007].
Jun Hongo, “Horei handed 2 ½ years: Upstart founder of Livedoor facing real time in a cell” The Japan Times , 17 March 2007, available online at the above-mentioned URL [accessed on 10 May 2007].
Kenichi Osugi, “Transplanting poison pills in foreign soil: Japan’s experiment” in Hideki Kanda, Kon-Sik Kim and Curtis J. Milhaupt (eds) Transforming Corporate Governance in East Asia (Routledge, 2008). “Horie off to prison, vows comeback” The Japan Times , 21 June 2011, . 4 A Subsequent Takeover Case: The Bull-Dog Sauce Case (Steel Partners Japan Strategic Fund (Offshore), L.P. v. Bull-Dog Sauce Co.) As of 18 May 2007, the Plaintiff (an investment fund) and its affiliates had 10.25% of the shares of Bull-Dog Sauce Co. (Bull-Dog). The Plaintiff invested in Japan through its wholly-owned company A which is established in the U.S.A . On 18 May 2007, A announced a takeover bid to acquire all the issued shares of Bull-Dog. The board of directors of Bull-Dog decided to oppose the takeover bid. It decided to propose a defensive scheme to the general shareholders’ meeting. The defensive scheme was: All shareholders would be allocated three share options/warrants per share.
Each share option/warrant, when exercised, gives a right to purchase one new share at one yen. The Plaintiff and its affiliates however were not entitled to exercise the share options/warrants. Bull-Dog may acquire the Plaintiff’s and its affiliates’ share options/warrants by paying 396 yen per share option. This is one quarter of the price in A’s takeover bid. The defensive scheme was approved by “83.4% of the votes of all shareholders” at a shareholders’ general meeting held on 24 June 2007. After the approval of the scheme by the shareholders’ general meeting, Bull-Dog’s Board decided that Bull-Dog would acquire the Plaintiff’s and its affiliates’ share options/warrants. Prior to the shareholders’ meeting, the Plaintiff sought an injunction from court regarding the issuance of the share options/warrants. The Supreme Court decided in favour of Bull-Dog and upheld the first instance court’s ruling on refusing to grant an injunction: It is the shareholders who should determine whether the “taking control of the company by a specific shareholder” will harm “the corporate value, the interest of the company and ultimately the common interest of shareholders”. On such matter, “[unless] there is a material flaw which deprives the legitimacy of the decision of shareholders… the shareholders' decision should be respected.” The defensive scheme was approved by “around 83.4% majority of the votes”.
In other words, “most existing shareholders” other than the Plaintiff and its Affiliates “have determined that the taking of control by [the Plaintiff and its Affiliates] would harm the corporate value of [the company], the interest of [the 5 company], and ultimately the common interest of shareholders”. There was no flaw in the procedure of the shareholders’ meeting. Regarding the issue of whether the defensive scheme is “against the idea of fairness and lacks reasonableness”, the scheme was approved at the shareholders’ meeting. The Plaintiff and its affiliates are entitled to payment when the share options/warrants are acquired from them according to the defensive scheme approved by the shareholders’ meeting “Even if this does not happen”, the Plaintiff and its affiliates, according to the decision of the board of Bull-Dog, “receive payment by offering the transfer” of the share options/warrants to Bull-Dog. “it cannot be said that the [defensive scheme] is against the idea of fairness and lacks reasonableness”. The defensive scheme was not “extremely unfair” – It is not “primarily intended for the maintenance of control by directors who are in charge of the management or shareholders who are supporting them”. (The above is from the judgment of the case (2007 (Kyo) No.30; Minshu Vol. 61 No.5) on the Supreme Court’s website: http://www.courts.go.jp/app/hanrei_en/detail?id=909)
