A RENGO Perspective Approaches and Policy Issues
Concerning Hedge andPrivate Equity Funds

RENGO - Japanese Trade Union Confederation
September 2007

Adopted by RENGO Central Executive Committee
in its 25th Session, 13 September 2007

Table of contents
INTRODUCTION(1) The Current Situation and the Background to the Emergence of Investment Funds(2) The Relationship between Enterprise Value and Workers(3) The Formation of an Undisciplined Market and Policy Issues
1. INVESTMENT FUNDS AND THE LEGAL FRAMEWORK FOR CORPORATEBUY-OUTS AND M&A(1) The Current State of Investment Funds and M&A and the Problems Involved(2) Currently Legal Forms of Corporate Buy-outs and M&A in Japana) When a Target Company Accepts an Acquirer’s Bidb) When a Target Company Rejects an Acquirer’s Bidc) When the Management Buys Out The Company
2. POLICY ISSUES AND DIRECTION(1) Issues Concerning Company Laws and Related Measuresa) Issues about Laws and Market Rules and Our Responsesb) Strengthening Responses in Taxationc) The Need for Socially Responsible Investment (SRI)(2) Labour Policy-Related Issues
3. COOPERATION WITH THE INTERNATIONAL LABOUR MOVEMENTREFERENCE: GUIDELINES FOR TRADE UNION RESPONSES(1) Everyday Effortsa) Basic Approachb) Protection of Employees in Corporate Buy-outs and M&Ac) Collective Agreements: Industrial Relations, Clarification of the Status and Rights
of Employeesd) A Solid Labour-Management Consultation: Keep Posted on the Situation andStrengthen Routine Activities(3) Responses to Corporate Buy-outs and M&Aa) Basic Approachesb) Prompt Collection of Accurate Informationc) Examination of the Contents of Acquisition Bidsd) Transmission of Information and the Gathering of Opinions within Trade Unionse) Systems for Forging Trade Unions’ Collective Views and Their Expressionf) Consultations with New Management, Confirmation of Employer Liabilityg) Intensification of Negotiations

INTRODUCTION(1) The Current Situation and the Background to the Emergence of Investment Funds
In recent years, the increase in corporate mergers and acquisitions (M&A) involving
investment funds, notably private equity (PE) funds and hedge funds, has had asignificant impact on the economy and on employment, raising important issues for theinternational labour movement. The inflow of funds into investment funds has been
expanding steadily, with assets managed globally by hedge funds reaching $1,740
billion and by PE funds $700 billion.
This rise is said to be caused by a global “money glut,” there being an expanding inflowof oil money due to rising oil prices and growing foreign currency reserves among
emerging economies. Also, financial institutions and pension funds have recently
incorporated into their portfolios investment funds that used to be investment vehicles
which were reserved mainly for wealthy individuals. There is also a problem in that themoney that workers have deposited or contributed through investment funds can beused to help destabilize jobs and working conditions.
(2) The Relationship between Enterprise Value and Workers
In the meantime, there have been public debates at various forums over “who owns
companies.” If one subscribes to the notion of shareholder supremacy, where theownership of a majority of equity shares in a company ensures control, then a company
is just a physical object for buying and selling (a commodity), with little attention paid
to the flesh-and-blood employees who work there. The enterprise value of the company
as a commodity is simply the market capitalization of its shares and the appraised valueof assets held. As shareholders are overly eager to pursue higher share prices and fat
dividends, corporate managers pursue short-term results and profits and become
reluctant to invest in the development of human resources and basic research from alonger-term perspective.
However, a company, in our view, is a public organ in society where a group of
employees as human beings develops a business, generates intellectual property andcontributes to society, that is to say, it is a company of human beings (a community).
The meaning and value of labour differs significantly depending on whether one
considers it a cost or a resource. If labour is taken as a cost, a company’s management
acts as if it is guided by the notion that the lower the cost, the better. However, when
labour is considered a resource, management behavior is geared toward theenhancement of the quality of labour through capacity development and education. In a
company as a community, needless to say, labour is a resource. In order for a company
to enhance enterprise value and realize sustained development, it needs to develop an
environment where employees can work enthusiastically.
(3) The Formation of an Undisciplined Market and Policy Issues
In Japan, however, the revision of the Company Law, oriented toward a shift to the
U.S.-style system, has led to excessive deregulation, and an undisciplined market isbeing developed to promote corporate buy-outs.
While the Financial Instruments and Exchange Law, put into force in September 2007,
may ensure a certain degree of control over and transparency in investment funds, it
falls short of regulating their investment behavior. Furthermore, in labour-related
legislation, some fundamental problems, including that of employer liability, remain-1-unresolved.
Based on this understanding of the current situation, we have looked at the policy issues
involved in the development of a disciplined and sound capital market and at tradeunion responses, and have formulated RENGO’s basic approach to M&A activities byinvestment funds. We hope the “Basic Approach” will serve as a good reference fortrade union responses and for policy recommendations regarding investment funds not
only within RENGO organizations but also in other quarters.

1.

INVESTMENT FUNDS AND THE LEGAL FRAMEWORK FOR CORPORATEBUY-OUTS AND M&A(1) The Current State of Investment Funds and M&A and the Problems Involved
Investment funds are “collective investment schemes for funds and money, where funds
are collected from investors for investment in companies, etc. and investors are
rewarded with dividends from target companies and with proceeds from their exchange
listings.” Investment funds are diverse in type, depending on the investment target andstance. They include such traditional investment funds as mutual funds as well as hedge
funds, private equity (PE) funds and activist funds, which have shown continued growth
in recent years.
RENGO has no intention of rejecting investment funds or their activities per se. Rather,
RENGO fully understands that these funds can perform an important social role in thatthey can financially support the sustained growth and development of companies andthe economy, and provide job security for workers. The problem lies in the existence ofsome investment funds that are preoccupied with paying the highest possible dividends
to investors, thereby distorting the genuine raison d'etre of an investment fund. Suchfunds eat away at the growth potential of companies by acquiring them through acircumvention of market rules and by slipping through holes in the law by using forleverage a massive pool of funds. They then demand exorbitant dividends throughpersonnel cuts and the sell-off of company assets, or they obtain huge margins in an
extremely short span of time by demanding that the management or some other party
concerned buy back the company at prices far in excess of the fund’s own acquisition
costs.
Moreover, since many PE funds procure acquisition funds using the assets of target
companies for collateral, these borrowings are recorded as debts in the balance sheets of
the acquired company after the takeover. The horizon of a PE fund is generally said tobe three to five years. Thus, investment and business plans mapped out on the basis ofstrategies for a few years down the road can hardly be regarded either as sufficiently
sustainable to contribute to the long-term interests of an acquired company or as
adequate to maintain good working conditions and steady employment.
In addition, due to the derivatives trading that is practiced by hedge funds and others,amounts of money far in excess of the actual investments made are racing around global
markets in a fraction of a second, raising the specter of the failure of just a handful offunds causing dysfunction in the global financial system as a whole.
Some investment funds escape legal requirements such as for registration, notificationof incorporation, and information disclosure by taking the form of investment
associations. The real investors in such funds remain unknown to the outside world dueto the high degree of anonymity involved, and, in many cases, their investment
performance or the scale of funds under their management are far from transparent.

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The total amount of capital dedicated to private equity business globally is said to be alittle over $700 billion as of the end of 2006. Large corporate buy-out funds have set
foot in Japan one by one in recent years. Trade unions must give full heed to thepossibility of most of their money being used to acquire Japanese companies.
Also, rules for corporate acquisitions have been significantly relaxed due to the recent
revision of the Company Act. The stock swap system was introduced in 1999, and theban on the so-called triangular merger structure was lifted in May 2007. These measures
are perceived to have made it easier for foreign corporations with enormous capitalstrength to acquire Japanese companies. RENGO does not necessarily regard every casein which a foreign firm acquires a Japanese company as evil. What matters is whether
the acquisition is really conducive to enhancing the enterprise value of an acquiredcompany and whether enough heed is given to working conditions and jobs as well as toindustrial relations.
At general meetings of shareholders in 2007, many Japanese companies proposed
measures to defend themselves against hostile acquisitions and have had them endorsed.
While some criticism was heard that corporate managers were proposing defensive
measures for their own protection, the widespread approval for these measures at themeetings was seen as vindication that management was indeed introducing defensive
measures in the interests of shareholders as a whole. Given that the relevant laws andmarket rules are still inadequate, individual companies’ efforts to introduce defensive
measures against takeovers are to some extent worthwhile. However, a mechanism toprevent corporate acquisitions that threaten the sustained growth of industries andcompanies should primarily rely on legislation and market rules.
(2) Currently Legal Forms of Corporate Buy-outs and M&A in Japan
In a normal corporate buy-out and M&A, an acquirer makes an approach of some sort
to a target company and after negotiations they proceed toward some form of businessintegration. Procedures and issues of concern differ depending on whether the target
company accepts or does not accept the acquiring company’s proposal.
In a management buyout (MBO) where the managers and/or executives purchase thecontrolling interest in a company from existing shareholders, a possible conflict ofinterest needs to be taken into account because the acquirer would continue to serve as
the management team of the acquired company.
a) When a Target Company Accepts an Acquirer’s Bid
When a target company accepts an acquirer’s proposal, the acquirer and the
to-be-acquired company consider the most suitable procedures for the integration of
their business. They then adopt integration procedures based on a bilateralagreement between the two parties. More specifically, various procedures, such as
the following, can be assumed: a merger and a stock swap or a transfer arrangement,
depending on the business operations of both companies, together with apost-integration vision for the company. Another possibility is for the acquirer tolaunch a takeover bid (TOB) and for the target company to give its consent to the
TOB procedure.
However, even if the target company ultimately accepts the acquirer’s bid, it ispossible that the to-be-acquired company was compelled to accept it due to heavypressure being brought to bear on it by the acquirer or by major shareholders in the
run-up to the final accord. Also, the managers of the target company may agree tothe takeover because they put their own personal interests ahead of the-3-enhancement of the enterprise value of the to-be-acquired company. Therefore, evenwhen the target company accepts an acquirer’s bid, trade unions need to ascertain
whether or not unreasonable decisions were made in the process leading up to theacquisition agreement.
b) When a Target Company Rejects an Acquirer’s Bid
When a target company rejects an acquirer’s acquisition proposal, procedures fortheir integration cannot be taken on the basis of an agreement between the acquirer
and the to-be-acquired company. Thus, if the acquirer is to realize the proposed
acquisition, it has to replace the management team of the target company in some
way or other and elect a new management team that complies with the acquirer’s
wishes, and then it can take the appropriate integration procedures.
In order to replace the management team of the to-be-acquired company, theacquirer must have enough votes to pass an agenda item for the election of board
members at the target company. It is therefore necessary for the acquirer to obtain amajority of the outstanding shares of the target company or to secure enoughsupporters among the shareholders so that their holdings, combined with those of
the acquirer, make up the majority of outstanding shares.
When the acquirer wishes to obtain the majority of outstanding shares in the target
company, it launches a hostile TOB for the to-be-acquired company. When theacquirer seeks the support of like-minded shareholders whose holdings, together
with its own holdings, make up the majority of outstanding shares, it submits ashareholder’s proposal for the election of members to the board of directors andsolicits proxy votes to garner enough support to have its proposal approved.
When the target company rejects the acquirer’s bid and the acquirer launches ahostile TOB or chooses to solicit proxy votes from supportive shareholders, thetakeover battle is decided by which side, that of the acquirer or that of the target
company, wins the support of the majority of the shareholders. In such a case, thetarget company’s management can be expected to carry out defensive measuresagainst the hostile bid in an effort to increase its support among the shareholders.
Usual measures of this kind can include the management increasing the company’s
capital through a third-party allotment of new shares or the issuance of share
warrants with discriminatory conditions, following which it can then ask
shareholders to vote in support of the management. However, once management
launches such a defense action, the acquirer will very probably file a court
injunction against the issuance of new shares or share warrants and thus bring thebattle into the courtroom.
Even when the target company rejects the acquirer’s bid, the management team of
the target company may make decisions by putting their own personal interests
ahead of the potential enhancement of the enterprise value of the target company.
Thus, trade unions need to ascertain whether or not unreasonable decisions weremade by the existing management team in the series of developments leading up to
management’s final decision to turn down an acquisition bid.
c) When the Management Buys Out the Company
Aside from acquisitions by outside acquirers, the managers and/or executives of acompany may decide to buy out the controlling interest in the company and turn it
into a privately-owned company. Most of the management buyouts (MBOs) carriedout in recent years are described as “buy-outs by the management.” In reality,-4-however, many MBOs were carried out under schemes where the funding for theacquisitions came from investment funds and other sources, with the management
financing only part of the acquisition costs. The existing management team thencontinues to operate the bought-out companies.
At any rate, in MBOs, the problem of a conflict of interest arises because theacquirer of the company is the existing management team of the same company.
Therefore, trade unions need to ascertain whether or not the management team isacting genuinely for the interests of the company or is trying to advance its own
personal interests at the expense of the interests of the company.

2.

POLICY ISSUES AND DIRECTION
In this section, given the current situation surrounding investment funds and on thebasis of our existing policies, we propose the future direction of RENGO’s policy. If
and when we decide to propose new demands in this area, the Policy Committee shouldhave an opportunity to make a review.

(1) Issues Concerning Enterprise Laws and Related Measuresa) Issues about Laws and Market Rules and Our Responses[The Company Law in the Loss of the Original Form of the Company]
The enforcement of the revised Company Law in 2006 led to the loss of the originalform of a joint-stock company, as companies that used to be categorized ascompanies with limited liability were made into joint-stock companies, andpolicy-related systems introduced under laws with limited periods of validity, suchas easier regulations on equity capital and a company’s ability to buy back its own
shares on the market, became permanent. Primarily, joint-stock companies shouldbe those companies that have many stakeholders, have a great deal of social
influence and are the hardest to manage. Another big problem is that the basic
concept of a company has become ambiguous, with corporate governance and othersystems disintegrating and becoming inconsistent because of the concept of ‘free
design.’[Lack of the Notion of ‘Workers’]
We are also concerned about the lack of the notion of ‘workers’ in the Company
Law. Workers and trade unions are legitimate constituents for the achievement of
the mission of a company and are indispensable entities for the enhancement of anenterprise’s value. However, considering the current situation where judicial
precedents regarding corporate acquisitions and defensive measures against
acquisitions have partially taken trade unions’ views into account if we understandthe legislation of the Law Concerning the Succession of Labour Contracts, Etc.
upon the Divisive Reorganization of Company as a special exception to theCompany Law, the notion of workers is actually being incorporated into the concept
and framework of the Company Law.
[Role of the Trade Unions and the Revision of the Company Law]
Trade unions, as stakeholders responsible in part for the enhancement of anenterprise’s value, should objectively and matter-of-factly judge whether investment
funds and other acquirers of companies are truly investors and equity participants-5-who can help enhance the enterprise value of a company. The tasks andresponsibilities of trade unions in strengthening corporate governance are extremely
serious and important, so trade unions must strengthen their ability to deal withmanagement so that they can accurately understand and grasp the company’s
financial situation and business environment.
Over the medium- and long-term, RENGO needs to work to have the Company
Law provide for the positions and roles of workers and trade unions in some formor other.
[Tougher Regulations over M&A by Investment Funds]
We must also intensify our efforts in policy areas regarding the regulation and the
securing of the transparency of investment funds as well as regarding improvements
in corporate acquisition rules. With the enforcement of the Financial Instruments
and Exchange Law, a registration system was introduced for financial instruments
companies. Compared to the previous framework, the new law marked a step
forward in that we can now have a picture of what kinds of funds are operating inJapan and we can also track the flow of funds from financial institutions toinvestment funds. However, provisions under the new law fall short of securing thetransparency of investment funds through disclosure of information and ofsafeguarding the rights of workers at companies in which funds invest. We need tocontinue our efforts in these areas.
Regarding legal regulations and the rules for corporate acquisitions and defensive
measures against takeovers, we need to consider improvements in market rules. The
Company Law was revised with U.S.-style free competition in mind. Because of
inadequate market rules, however, individual companies find it necessary to devise
their own defensive measures against hostile acquisition bids. However, since theUnited States has different legal systems concerning corporate organizations andcorporate acquisitions, as shown by the lack both of federal corporate laws and of
takeover defense measures in state law, there seems to be little Japan can refer to in
U.S. systems to help it improve corporate acquisition rules in the Japanese market.
Thus, Japan needs to develop and improve its corporate acquisition rules fitting in a
way that suits conditions in Japan (including the introduction of an obligation topurchase all outstanding shares) with reference to the “City Code” introduced in
U.K. and other European countries, while seeking to strengthen the monitoring
ability of the Securities and Exchange Surveillance Commission (SESC) and ofother public supervisory institutions.
We must also seek an integrated improvement of the legal system concerning
corporate acquisitions, including a stricter monitoring of corporate merger screening
under the Anti-Monopoly Law and a review of inward investment regulations under
the Foreign Exchange and Foreign Trade Control Law.
b) Strengthening Responses in Taxation
The behavior of investment funds is likely not only to affect the productivity ofacquired companies and the employment and working conditions of their workers
but also to result in tax revenue reductions for national and local governments. For
example, when an acquired company pays dividends to an investment fund withborrowed money, the tax base shrinks because of the deduction of the acquiredcompany’s interest payments on debt and because of the measure that excludes
dividends received by the investment fund from gross revenue. Profit-making even-6-

jeopardizing the sustainability of companies and jobs must be taxed in an
appropriate manner under the principle of equity and from the viewpoint of
securing tax revenues. Efforts are under way to tax investment funds properly inother countries. In 2007, the governing and opposition parties in Denmark forged anagreement on tax reform, and a supra-partisan group of legislators is examining theissue in the United States.
Investment funds often take the form of associations under the Civil Code, i.e. they
are anonymous associations and investment business limited partnerships. In thesecases, associations or partnerships are not taxed, and taxes are imposed on
individuals and corporate entities that invest in the associations or partnerships(pass-through taxation). Thus, the question is how we can ensure proper taxation ofthese investors.
Previously in Japan, when funds distributed profits to non-residents and foreign
judicial persons, they were not required to withhold income taxes. But a measure tocollect the 20% withholding tax was introduced under the FY 2005 tax system
reform. However, associations with a membership of less than 10 are still exempt
from the withholding obligation. Furthermore, there was not enough information
available on the assets and income levels of these funds. Under these circumstances,in the FY 2007 tax reform, Japan required all anonymous associations to collectincome taxes at source, and funds that are organized as associations were also
required to submit documents regarding their financial situation. For the time being,
we need to monitor the implementation of these measures.
Following the lifting of the ban on triangular mergers, under the FY 2007 tax
reform, a measure was introduced to defer taxation at the time of a merger ifbusiness continuity and certain other conditions are met, while gains on the sale
were made subject to taxation without deferment in the two cases of a merger
through a subsidiary that exists in name only or of a merger brought about by thedelivery of shares from an insubstantial parent company registered in a tax haven.
Going forward, tax authorities need to boost their organizational preparedness tohelp enhance the effectiveness of these measures.
However, it is still possible that taxation may remain inadequate in cases ofcross-border corporate acquisitions. In triangular mergers, for example, under the
FY 2007 tax reform, if the shareholders of an acquiring parent company and an
acquired company are both non-residents, gains on the sale of shares are taxed at
the time of a merger in order to secure taxation in Japan. However, in revisions inrecent years to the bi-lateral tax treaties that Japan has concluded with othercountries, there has been a trend toward changing the point of taxation in dividends
and other income from the country that is the source of the income to the taxpayer’s
country of residence. These changes are accompanied by reduced rates or
exemptions on withholding income taxes for non-residents and foreign judicial
persons. Depending on the tax treaty, it is conceivable that taxes are uncollected not
only in Japan but also in the country that is the other party to the treaty.
Adequate taxation measures are not taken either concerning the income of equity
participants in investment funds or fund managers. Tax rates for income taxes on
dividend income and capital gains on stock sales, currently assessed separately,
have been lowered several times in the past, and further preferential treatment was
accorded under the FY 2003 tax reform. As a result, these people’s present tax rates
are lower than the income tax rates for ordinary workers.
Given these circumstances, it is necessary to prepare an appropriate framework of-7-

taxation for investment funds and fund managers and also to work toward greaterinternational co-ordination. Specific measures can include (a) the immediate
abolition of preferential treatment for income tax on dividend income and capitalgains and the establishment of higher-than-usual withholding tax rates on highdividend income and large capital gains, particularly those arising from short-termtransactions; (b) the introduction of a taxpayer identification number system and theshifting of financial income taxation from a separate to a consolidated income
taxation system; (c) limitations on measures for the exclusion from gross revenue ofdividend receipts in corporate taxation, when investment funds, as judicial persons,receive excessive dividends or fees from acquired companies; (d) efforts to secure
Japan’s right of taxation and to increase the withholding tax rates in tax treaty
revisions; and (e) the review of guidelines (such as the “OECD Model Tax
Convention”) at the Organization for Economic Cooperation and Development andother international organizations in view of the behavior of investment funds,
together with continuous consultations with countries that serve as tax havens.
c) The Need for Socially Responsible Investment (SRI)
Various pension funds and financial institutions often invest in investment funds. It
is necessary to work on pension funds and financial institutions to practice socially
responsible investment (SRI) so that funds contributed by workers and trade unions
do not have an adverse impact on jobs and workers’ conditions because of theactivities of investment funds.
(2) Labour Policy-Related Issues
One of the major issues related to labour laws and/or labour policy and investment
funds is the problem of employer liability on the part of the investment funds.
Regarding this problem, at the urging of RENGO, the Ministry of Health, Labour andWelfare (MHLW) set up a study group (The Study Group on Industrial Relations at
Companies Acquired by Investment Funds, etc.) and in May 2006 this group produced areport (see the attachment, “A Report by the Study Group on Industrial Relations at
Companies Acquired by Investment Funds, etc.”).
When an investment fund acquires shares in an acquisition target company, it is just one
shareholder, and no one can claim that the fund, simply because it is a major
shareholder, is a negotiating partner for a trade union in collective bargaining. The big
problem with the current Trade Union Law is the lack of provisions for the definition ofan employer. According to past court precedents, even in the absence of a direct
employment relationship, a party can be recognized as having employer liability if it isin a “position to realistically and specifically control and make decisions on basic
working conditions, etc. to a degree identical, even partially, with that of an employer.”
The afore-mentioned report by the study group of the MHLW also concluded that as it
is difficult to present uniform criteria for judgment regarding specific requirements for
employer liability, it is appropriate to make judgments on a case-by-case basis.
RENGO believes that in judging the employer liability of investment funds, aninvestment fund should be recognized as having employer liability if the fund owns acertain ratio of shares in an acquired company and actually wields influence over theacquired company both qualitatively and from a personnel viewpoint, for instance, if it
sends in its people to sit on the board of directors of the acquired company. The
definition of employer liability should be clarified in relevant labour laws.
Furthermore, the report of the study group stated, as “points” to build good industrial-8-relations between investment funds, etc. and acquired companies and their workers, that(1) investment funds, etc. recognize that they could become employers; (2) bothacquired companies and investment funds, etc. recognize the importance of collective
bargaining at acquired companies; and (3) investment funds, etc. offer opportunities forpre-acquisition explanations and for an exchange of views about post-acquisition
management policies. It is of particular importance to have labour-management
consultations to clearly convey the views of employees and to exchange views.
While the MHLW has said it will strive to make the above-mentioned “points” widely
known, given developments so far, that effort alone can hardly be expected to ensure
their effectiveness. RENGO, in addition to legal provisions for the definition of
employer liability, will press the MHLW to at least develop guidelines as quickly as
possible and to formulate measures to make it possible to provide guidance toinvestment funds, etc. RENGO will also make continued efforts to develop amicableindustrial relations in corporate acquisition cases.

3.

COOPERATION WITH THE INTERNATIONAL LABOUR MOVEMENTIn March 2007, the Trade Union Advisory Committee to OECD (TUAC) issued astatement calling for a new set of international regulations regarding the transparency
and taxation of PE funds. Recognizing that “the very high rates of return required tofinance private equity debt-driven buy-outs can jeopardize target companies’ long-term
interests and the provision of decent working conditions and security for employees,”
the statement called on the Group of Eight (G8) leaders to create an international
regulatory task force, comprised mainly of OECD member states, to address thefollowing four areas: the principle of transparency, the securing and promotion ofworkers’ rights, the reconfiguration of tax regulations, and the establishment ofcorporate governance. In response, the OECD is considering the application of theOECD Guidelines for Multinational Enterprises.
The International Trade Union Confederation (ITUC) at its General Council meeting in
June 2007 adopted a report entitled “Where the House Always Wins: Private Equity
Funds, Hedge Funds and the New Casino Capitalism”. Global Union Federations(GUFs), as part of the international labour movement and agreeing with the recognition
above, have also formulated or are in the process of formulating their own responses toinvestment funds. Also, regarding socially responsible investment (SRI), in particular
the UN Principles for Responsible Investment, the ITUC and other global trade unions
are about to publicize guidance of for trade unions in the autumn of 2007.
Investment funds are operating in markets around the world. As national regulations andmeasures concerning investment funds have their limitations, efforts must be made froma global perspective with the cooperation of all countries. While statistics are notnecessarily clear, Asian countries, where market regulations and rules remain
under-developed, will probably experience even greater effects from investment funds
than Japan. Thus, Japan’s role and its responsibilities are extremely important.
RENGO will continue to express its views and provide information to the international
labour movement regarding economic and labour policies that contribute both to thestability of workers’ employment and their working conditions and to sustainableeconomic growth and development.

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REFERENCE: GUIDELINES FOR TRADE UNION RESPONSES
In this section, we provide guidelines for trade union responses to M&A’ and otherinvestment fund activities as a reference for the formulation of manuals and policies bymember organizations and individual trade unions(1)

Everyday Effortsa) Basic Approach
A characteristic of industrial relations in Japan is the effort to maintainlabour-management communication through the labour-management
consultation system. Indeed, labour-management consultative organizations are
set up at 84.8% of companies where trade unions are organized. According to
the Survey on Labour-Management Communications (2004) by the MHLW, thelabour-management communication system is in better shape at companies withtrade unions than at companies without them.
In addition, Japanese companies generally have top executives who haveclimbed up the in-house ladder of promotion. At large corporations, it is notuncommon for top executives and other officers in managerial positions to beformer trade union members.
Trade unions in this model of industrial relations play the role of partners incompany management. Those who must bear the onus of management decisions
made by the current managers are the next generation of managers who willtake over from the current teams and employees who now work under them. In
other words, many of trade union executives at present are steersmen of
corporate communities who will become part of the company’s management
team in the future.
It is important for any shareholder to treat workers and trade unions asimportant stakeholders and to seek sufficient communication with them. If tradeunions and management can share the same perception of corporate
management and build good industrial relations with a due sense of tension,that should prove a short cut to the enhancement of enterprise value and be in
the best interests of all stakeholders, including the shareholders. So, it isnecessary to seek fruitful labour-management consultations on a routine basis
and to develop sound industrial relations with a due sense of tension.
b) Protection of Employees in Corporate Buyouts and M&A
It should be noted that under any corporate buy-out and M&A scheme, theCompanies Law or the Financial Instruments and Exchange Law do not directly
provide for the protection of employees.
The Company Law governs such matters as the relationship between companies
and their shareholders, who are equity participants in joint-stock companies,
and supervises members of the companies’ boards of directors as well as theinternal auditors and accounting auditors who assist the directors. Under the law,
employees are those employed by directors to sustain a company’s operations.
Employees are not subject to governance by the current Company Law.
The Financial Instruments and Exchange Law is designed to ensure the fairissuance of securities and fair transactions in financial instruments, the smooth
circulation of securities, and fair prices for financial instruments through thefull realization of capital market functions. Regarding joint-stock companies,- 10 -

the law provides for fair trading in stock markets (in other words, the protectionof shareholders). Thus, though it has provisions for managers of share-issuing
companies and for those who trade in shares (shareholders), the Financial
Instruments and Exchange Law does not govern employees employed bydirectors to sustain a company’s operations.
Furthermore, theoretically, corporate acquisition and M&A schemes alter only
the capital structure and the composition of directors, and bring no changes to acompany’s operations. Thus, as long as business operations continue, changes
in equity participation in a company or its directors do not alter the relationshipbetween the company and its employees. Under such circumstances, labourlaws and court precedents do not allow for any unilateral change that is
detrimental to employees.
As discussed above, the Company Law seeks the proper management ofcompanies by the governing equity participants, the directors, and those whooversee corporate management (internal auditors and accounting auditors),
while the Financial Instruments and Exchange Law seeks to maintain a fair andsound stock market by governing equity participants (shareholders), issuing
companies (companies) and their managers (directors). Thus, the maintenanceof an appropriate relationship between a company and its employees has to be
dealt with, legally, under the Labour Standards Law and other relevant laws.
Therefore, as it is difficult in many cases to consider responses directly basedon the Company Law, trade unions must begin by preparing for matters that canbe approached in the context of industrial relations and labour laws.
c) Collective Agreements: Industrial Relations, Clarification of the Status andRights of Employees
Regardless of any change in the capital structure of companies or in thecomposition of a company’s directors, it is necessary to secure the status andrights of employees in line with the Labour Standards Law, collective labour
agreements, etc.
In particular, if ambiguous aspects remain unresolved in industrial relations, it
is highly likely that they will lead to problems in the securing of proper terms
and conditions for labour. Thus, it is important to keep collective labour
agreements in good shape and to clarify matters between trade unions andmanagement concerning labour-management consultations and working
conditions. It is necessary for trade unions to secure satisfactory collective
agreements while collaborating with superior organizations as necessary(RENGO’s Guidelines for Model Collective Agreements, [2001] provide forresponses in terms of corporate restructuring and collective agreements).
Furthermore, if collective agreements do not have any provision for a period ofvalidity, companies may unilaterally give an advance notice of termination 90
days prior to the intended termination date. It is therefore important to ensurethat collective agreements provide for a period of validity and not fail to makeprocedures for the renewal of collective agreements.
d) A Solid Labour-Management Consultation: Grasp the Situation and Strengthen
Routine Activities
Even when the capital structure of companies and the composition of directors- 11 -

are altered, employees may not face any particular problem as long as there is
no change in industrial relations, and employment and working conditions aremaintained. Changes in the capital structure and the composition of directors
may even produce a synergy with an acquirer being able to boost corporate
performance. The execution of so-called good acquisitions can benefit
employees.
However, problems arise for employees if the acquisition brings in a newcapital structure and new directors, and the new employer seeks to enhance acompany’s performance through the lowering of working conditions. However,
we need to make it clear that even with changes in capital structure and thecomposition of directors it is not legally permitted to change working
conditions to the disadvantage of employees without reasonable reasons.
Trade unions need to routinely keep the labour-management consultation
system solid and operational in order to forestall any unilateral lowering ofworking conditions as a result of acquisition-driven changes in the company’s
capital structure and directors. In particular, numerous cases in recent years, inEurope and the United States as well as in Japan, show that PE funds are often
hostile to trade unions. It is therefore necessary to put a mechanism in place toenhance the knowledge and skills of trade union executives and internally toaccumulate enough know-how through routine activities for trade unions topresent their views, opinions and proposals in consultations and negotiations
with the new management teams in the event of a corporate acquisition or
M&A.
It is also important for trade unions to strengthen their presence not only before
any acquirers but also in front of the current management through their routine
efforts and activities. Each member of a trade union needs to be aware that thein-house accumulation of a variety of technologies and skills and the reliable
relationship with customers are the very source of enterprise value. Trade union
executives must recognize that the steady execution of day-to-day business
operations and the growth of each member of a trade union contribute to theenhanced presence of the trade union.
(2)

Responses to Corporate Buy-outs and M&Aa) Basic Approach
Corporate acquisitions and M&A are carried out in order to control the
management of a target company through a majority acquisition of thecompany’s capital structure so that they can bring the company under theircontrol, at which point the management of the two parties can then be
integrated.
Changes in capital structure and in the composition of the directors areultimately determined by the shareholders who are equity participants in thetarget company. Needless to say, it is impossible for an unspecified majority ofshareholders to negotiate directly with a potential acquirer. As such,negotiations with the acquirer are conducted primarily by the management teamthat has been entrusted by shareholders with the running of the company. Yet,the shareholders make the ultimate decision. The success and failure of theacquisition bid depends on the judgment of the shareholders who decide
whether or not to accept it at a general meeting of the shareholders or onwhether or not to sell their holdings in response to the TOB. However, the- 12 -

criteria for shareholders’ decisions, when deciding whether or not to accept or
reject the acquisition offer, is whether the offer will enhance the enterprisevalue of the company they own. Employees are the human element of thecompany that organically combines with physical elements, such as plants andequipment, to constitute the value of the business (enterprise value), and as such,they are an extremely important element in the formation of enterprise value.
Therefore, the views of employees about the acquisition offer can be consideredsignificant in influencing shareholders’ decisions and may even affect thesuccess or failure of the acquisition itself.
Since the views of employees about the acquisition offer are an important factor
that can potentially influence the success or failure of the acquisition bid, tradeunions must try and gather and transmit information in an appropriate and fairmanner in order to use their de facto clout in an appropriate and fair manner.
b) Prompt Collection of Accurate Information
Since an acquirer’s bid is very sensitive trade information, it is not easy for
trade unions to obtain that information while behind-the-scenes negotiations arebeing carried out following the acquirer’s approach to the management of atarget company.
However, it is necessary for trade unions to ask the management to disclose any
relevant information as quickly as possible through labour-management
consultations, etc., and at the same time to review the information management
systems of trade unions and to make the utmost efforts to prevent any leak ofsuch information.
After the acquirer’s proposal is disclosed, trade unions should also consider
making approaches to the acquirer for a broader disclosure of any information
they want to know, in addition to seeing officially disclosed information andmaterials. While the disclosure of information to trade unions has no legal
grounds, trade union approaches to the acquirer could still effectively elicit a
response. Another option is to obtain necessary information by posing questions
through the management to the acquirer.
Specifically, trade unions should strive to obtain information on
post-acquisition policies and business plans, and must also make efforts toimprove their knowledge and skills so that they can understand and analyze thecontents of such management policies and plans.
In the case of a hostile takeover bid, it is useful for trade unions to examine
what sort of information is necessary, even in the absence of a specific bid, sothat they can make the necessary approaches in a timely and appropriatemanner once such bids are actually made. It is also useful to run a simulation on
who should be approached and in what manner in order to obtain any necessary
information.
At the same time, it is also important to obtain and analyze information about
the track record of corporate takeovers by the acquirer in question. The sameacquirer can have different objectives (pure investment, participation in
management, etc.) for individual cases. It is important to ascertain the intentionsof the acquirer and to analyze the contents of the takeover bid.

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c) Examination of the Contents of Acquisition Bids
After obtaining accurate information on the acquirer’s proposal, it becomes
necessary to examine the reasonableness and relevance of the proposal from a
trade union standpoint. As proposals from potential acquirers can vary greatly,
trade unions cannot really consider acquisition proposals until after the bids are
actually filed. It is difficult to prepare in advance, but it is still possible for tradeunions to consider and prepare for things like their initial response, for instance,
as to which members should initially be assembled to analyze the contents ofthe bid.
d) Transmission of Information and the Gathering of Opinions within Trade Unions
After trade unions have obtained sufficient information and have conducted apreliminary examination, it then becomes necessary to convey this information
to individual union members and to gather their opinions in order to form thecollective view of the trade unions.
If trade union members are scattered among branch offices and plants across thecountry, it is not easy for trade unions to disseminate information to all union
members and to gather their opinions in a short period of time. Therefore, tradeunions need to consider, in advance, the methods and systems for disseminatingsuch information to individual union members and for collecting their opinions
accurately.
e) Systems for Forging Trade Unions’ Collective Views and their Expression
Even after gathering the opinions of individual trade union members, in order todevelop the collective view of the trade unions and to transmit it externally, itagain becomes necessary to obtain the support of individual union members forunion policies. It is necessary to consider and develop systems to make thewhole process workable. Trade unions also need to consider ways ofcommunicating their collective views about the acquisition proposals externallyand to think of ways to coordinate with management concerning such
communication.
Depending on the contents of the acquisition proposal, there may be cases
where employees feel like accepting an acquisition bid even if it is hostile (a bid
rejected by the management). In such cases, trade unions will express theirsupport for the bid after careful analysis. There have been cases where themanagement unfairly pressured individual trade union members into opposing
bids that they rejected. To deal with such eventualities, trade unions need tohave an opportunity to express their opinions from fair and independent
viewpoints and to consider ways of securing such opportunities.
f) Consultations with New Management, Confirmation of Employer Liability
After the consummation of the acquisition, trade unions should holdlabour-management consultations with the new management as soon as possible
and examine post-acquisition management policies and business plans anew toascertain that they are not detrimental to jobs and working conditions. While itis necessary to conduct collective bargaining as the occasion demands, theimportant thing is actually to have consultations and negotiations with thecounter-party that has control over the company. Even when the acquirer is aninvestment fund, the employer liability of the fund can be recognized if it- 14 -

actually has a controlling influence over the management of the acquiredcompany. Since there are no clear legal provisions for the definition of
employer liability, trade unions have to deal with the issue on a case-by-casebasis. Individual trade unions and their superior organizations should cooperatewith one another, while drawing upon court precedents, and they should also
consult lawyers and other legal experts as necessary.
g) Strengthening of Negotiations
If, despite such action by the trade union regarding the M&A, the acquirer
continues to react unfairly regarding jobs, working conditions and industrial
relations, trade unions need to strengthen their negotiations and to preparecontingency responses for every possible scenario. In such a case, on thestrength of full collaboration among individual unions, superior organizations
and legal experts, trade unions will launch powerful responses in line with theirrespective policies.

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