A Response to John Armour, Jack B. Jacobs and Curtis J. Milhaupt by Zenichi Shishido

by Harvard International Law Journal

[Zenichi Shishido, a Professor at the Graduate School of International Corporate Strategy, Hitotsubashi University, responds to John Armour, Jack B. Jacobs and Curtis J. Milhaupt, The Evolution of Hostile Takeover Regimes in Developed and Emerging Markets: An Analytical Framework]

It is a great pleasure to be able to comment on Armour, Jacobs, & Milhaupt’s excellent analytical, comparative study on a major issue of corporate governance. The article is focused on hostile takeover regimes and, at the same time, covers wide areas of the world, including three developed and three emerging capital markets. It is also important to note that they provide an analytical framework for analyzing different modes of business law reform in general, from the perspective of demand- and supply-side factors, which could be applied to a wide range of legal reforms.

The article starts by raising a good question of why the regulatory responses to hostile takeovers are very different among the three countries who share the similar capital markets (the United Kingdom, the United States and Japan). After applying their analytical framework to the three countries, the authors outline a suggestive prediction for the three emerging markets (China, India and Brazil), particularly from the experience of Japan. The Japanese mixture of the Delaware and U.K. approaches satisfies the conflicting imperatives of the capital market and the interest of incumbents. Enforcement sharing between the courts and Tokyo Stock Exchange is a Japanese characteristic and may be instructive to emerging markets.

I will comment on this article mainly from the Japanese perspective, not only because I am a Japanese academic lawyer but also because the Japanese experience of constructing its regulatory response to hostile takeover plays a key role in the article.

The article adequately observes Japan’s hostile takeover regimes as a mixture of both the U.K. system and the U.S. system (p. 154*). I would like to point out that the way the regimes have been mixed is a big problem.

I think that the most important point of good hostile takeover regimes is to keep overall balance between “management autonomy” and “shareholder monitoring“ in the regulation of buyers and the regulation of sellers (see Zenichi Shishido, Reform in Japanese Corporate Law and Corporate Governance: Current Changes in Historical Perspective, 49 Am. J. Comp. L. 653). The U.K. system maintains a good balance by putting strong regulations on both buyers and sellers—that is, requiring buyers to make mandatory bids for all shares and prohibiting incumbents from any defense. The U.S. system maintains another good balance by putting weak regulations on both buyers and sellers—that is, not requiring buyers to make mandatory all-share bids but allowing boards to implement defenses. Japan’s system takes the U.K.-like takeover rule and the US-like defense rule. As a result, the balance weighs too much on management autonomy.

A major reason why Japan’s system failed to achieve a good balance is the competition among “subordinate lawmakers” (p. 108), that is, governmental agencies. The Ministry of Justice (MOJ) has formal jurisdiction over corporate law and the Financial Supervisory Agency (FSA) has formal jurisdiction over securities regulation. Although both corporate law and securities regulation govern hostile takeovers, most experts consider that it is almost impossible for the two agencies to coordinate to maintain a good balance. Although the Takeover Guideline of 2005 is co-authored by Ministry of Economy, Trade and Industry (METI) and MOJ, it was initiated by METI, which lacks formal jurisdiction over the corporate and securities laws (p. 135). METI has, however, been a quasi-co-subordinate lawmaker of corporate law with MOJ, particularly since the Commercial Code reform of 2001, from the perspective of improving Japanese companies’ global competitiveness and reflecting the voice of industries. On the defense regulation side, the coalition between MOJ and METI was tightened. On the other hand, FSA has been reforming securities regulation from the perspective of investor protection, reflecting the voice of capital market participants. In the reformation of 2006 (the Financial Instruments and Exchange Law), FSA strengthened the U.K.-type characteristics of its takeover bid rule with the support of issuing companies, which are capital market participants and potential targets. At that time, FSA and METI shared the same interest.

Why did MOJ and METI cooperate on this issue? It is easier to understand the incentive of METI, which is generally shared by public regulators. Just as the article tells us, “agencies are likely to be favorably predisposed to general new rules, since greater activity tends to justify their existence and increase their power, prestige and budgets” (p. 109). It is a bit more complicated to understand the incentive of MOJ because it had to share its jurisdiction with another agency. MOJ was forced to cooperate with METI, I think, both because making the defense rule was too urgent of a matter for MOJ to handle alone and because the consensus building on the defense rule by the formal MOJ process was difficult. In the ordinary MOJ process of law-making, MOJ consults the Committee of Legal Reform (Hosei Shingikai), before it proposes the draft of a new law to the Diet. The process usually takes at least more than a year. METI can provide a less formal and quicker process of rule making. The above is also an answer to a question raised by the article: “Why was this process carried out without elected government officials?” (p. 143).

Such a situation of competition among governmental agencies could provide an answer to another question raised by the article: “Why did an institutional enforcement-sharing arrangement among subordinate lawmakers (courts and the Tokyo Stock Exchange) occur in Japan, but not in the United States and United Kingdom?” (p. 146). It is simply a “war between agents.” Courts and MOJ are almost the same because some elite judges spend major part of their carrier at MOJ drafting laws. FSA is very influential in the Tokyo Stock Exchange.

A remark on Takeover Guidelines is very interesting: “the attraction of Delaware doctrine is quite remarkable . . . . One might have expected the Japanese to be drawn more closely to the U.K. City Code, which arguably fits Japan’s climate of informal consultation and administrative management better than does the adversarial, court-centered approach of the United States” (p. 135). A big reason why the City Code approach was not adopted is that the principle of shareholder primacy is neither accepted nor rejected in Japan. As the article correctly pointed out, “effective norm-based private rules presuppose a high degree of homogeneity among participants.” Not only is there no established norm to solve disputes raised by hostile takeovers, but there are also no market actors who can represent the interests of various participants. Therefore, the Panel-type resolution is not feasible in Japan and the resolution by courts is the second best choice.

My last remark on their analytical framework is on the way in which new business regulation emerges (pp. 105–114). The framework presupposes that all cases of new business regulations are “demand pull.” Japanese experience of corporate law reforms, however, tells us that there are not only demand pull legislations, but also “policy push” legislations (See Shishido, supra; Zenichi Shishido, The Turnaround of 1997: Changes in Japanese Corporate Law and Governance, in Masahiko Aoki, et al., eds., Corporate Governance in Japan 310). It is probably because Japanese legislations still have a developing country–like nature of learning from developed countries. Such a point of view might be necessary to analyze the case of emerging markets.


* Unless otherwise noted, page numbers reference John Armour, Jack B. Jacobs and Curtis J. Milhaupt, The Evolution of Hostile Takeover Regimes in Developed and Emerging Markets: An Analytical Framework, 52 Harv. Int’l L.J. 219 (2011).


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