The advent of the “shareholder rights plan,” more popularly known as the “poison pill,” fundamentally altered the trajectory of American corporate governance. Intended to defend vulnerable boards from corporate raiders, the poison pill was embraced by U.S. managers in the 1980s as a lifeline in a sea of hostile takeovers. When pundits predicted an imminent wave of hostile takeovers in Japan in the mid-2000s, Japanese boards appeared to embrace the poison pill with equal enthusiasm.
Japan’s experience might have been evidence that corporate governance around the world was destined to converge on the American model – but for two inconvenient truths. The first inconvenient truth, which two of us explored in our article, “The Enigma of Hostile Takeovers in Japan: Bidder Beware,” is that Japan’s poison pill is fundamentally different from the American version. The second inconvenient truth, which our recent working paper “Land of the Falling “Poison” Pill: Understanding Defensive Measures in Japan on Their Own Terms” exposes is that the poison pills that were the darling of Japanese companies in the mid-2000s have since gone into sustained decline and appear to be heading for extinction.
Specifically, after an initial boom from 2005 to 2008, during which hundreds of Japanese companies adopted pills each year, fewer than 10 pills were adopted each year over the following decade. What’s more, in 2013–2014, the number of companies that dropped previously existing pills suddenly rose. What caused listed companies in Japan to virtually cease adopting new pills beginning in 2008, and what caused non-renewals to increase in 2013–2014 and then continue rising since?
Our working paper seeks to answer these questions by providing what is, to our knowledge, the first in-depth analysis of Japan’s surprising reversal on the poison pill. Specifically, our paper offers three explanations for the reversal, supported by empirical data, case studies, Japanese jurisprudence, and an in-depth review of Japanese academic literature and financial industry reports.
First, the fact that a predicted tsunami of hostile bids in the mid-2000s never occurred, combined with a dearth of hostile acquirers following the 2008 Global Financial Crisis, reduced the threat of hostile takeovers that prompted adoption of pills before 2008.
Second, the Japanese version of the poison pill is a far cry from the potent poison that many thought it would be when the government approved its use in 2005. Over the past decade, it has become increasingly clear that the so-called “pill” in Japan lacks the active ingredient of its American namesake: providing the board – without shareholder approval – with a veto right over a hostile bid. Empirical evidence demonstrates that most Japanese pills require some form of shareholder approval – which makes sense, considering that they have been developed in the context of Japanese jurisprudence, which is unclear on whether boards – without shareholder approval – can adopt, maintain, or trigger a pill.
We query whether a pill that requires shareholder approval should even be called a “pill” – a point discussed in detail in our working paper. Here, the crucial point is that, as it has become increasingly clear that Japanese pills fail to provide the board with an unambiguous veto – without shareholder approval – over a hostile bid, the incentive for management to adopt them has significantly diminished.
Third, more recent changes to corporate governance in Japan have increased institutional-investor resistance to new pills and, more importantly, to approving the renewal of expiring ones. In 2015, Japan adopted a “comply or explain” Corporate Governance Code with an idiosyncratic provision: the requirement that companies either forgo a poison pill or explain why one is necessary – which has become a particularly challenging task in the only major developed economy that has yet to have a successful hostile takeover. Then, in 2017, Japan amended its Stewardship Code, which now requires institutional investors to disclose their votes on individual agenda items, including any support for the renewal of a poison pill. Again, this has been no easy task given the absence of a credible, general threat of hostile takeovers.
The timing of the amendment to the Stewardship Code appears to be significant. Shortly before Japan’s revised Stewardship Code went into effect, the ratio of removals to adoptions of poison pills increased markedly, striking a devastating blow to the pill in Japan – and coinciding with institutional investors’ voluntary disclosure of their votes to prepare for the inauguration of the Stewardship Code. This fall of the poison pill suggests that Japan’s Stewardship Code amendment may have prevented institutional investors from continuing to act in support of management – a tangible impact on corporate governance not previously foreseen or contemplated by the growing international stewardship literature.
This post comes to us from Alan K Koh, research associate at the Centre for Asian Legal Studies at the Faculty of Law of the National University of Singapore; Professor Masafumi Nakahigashi at the Nagoya University Graduate School of Law; and Associate Professor Dan W. Puchniak at the National University of Singapore Faculty of Law. It is based on their recent paper, “Land of the Falling ‘Poison’ Pill: Understanding Defensive Measures in Japan on Their Own Terms,” available here. A version of this post is available on the Oxford Business Law Blog here.