October 10, 2018

Letter on Takeover Defense Measures – Are They Really Necessary? (abridged translation)

IICEF and the five participants of its collective engagement program (Pension Fund Association,Sumitomo Mitsui Asset Management, Sumitomo Mitsui Trust Asset Management, Mitsubishi UFJ
Trust Bank, and Resona Bank) have jointly started sending letters to listed companies with takeover
defense measures/programs. In the letters we (IICEF and the participating institutional investors
mentioned above) discuss investors’ concerns over Japanese companies’ takeover defense measuresin general. In the letters we also ask companies which are going to renew their programs to clearlyexplain why their shareholders should approve the renewed programs in appropriate disclosurematerials, such as proxy voting related and other SR/IR materials, before the relevant shareholders’meetings.
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1. Target companies
Out of listed companies whose takeover defense programs should expire in 2019, we picked up/willpick up multiple companies with relatively large market capitalization, which we believe are ready tohave constructive dialogues with institutional investors. For now, we do not plan to disclose thenames of the target companies.
2. Key messages(1) Investors’ perspective on takeover defense measures
The participating investors run passive investments, and we are primarily interested in long-termvalue creation of the listed companies in Japan. We will not pursue short-term shareholder return,and therefore basically we will not support abusive takeover actions by short-term investors who
sacrifice long-term corporate value.
In 2009, Japan’s TOB rule was revised to reduce the scope for acquirers’ regulatory arbitrage and tointroduce the “purchase all” obligation. Also, companies have become able to request acquirers’
information, securing time for reviewing their offers. In addition, we saw a judicial precedent toaccept a takeover defense measure (poison pill) adopted after a hostile takeover proposal based on
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approvals at shareholders’ meetings, etc., and to deny the directors’ responsibilities for selling sharesto white knights at lower prices than hostile takeover offer prices.
Thanks to the developments in laws and regulations, we believe that the risk of abusive takeover has
been reduced substantially in Japan. (By making an in-market purchase, not a TOB, an acquirer canpossibly buy one-third or more of a company’s outstanding shares to control its business, but thatwill not be so easy considering a possible stock price hike.)
In some cases, takeover defense measures are allegedly introduced in order to prevent overseas
leakage of important confidential technological information. However, what can be prevented bytakeover defense measures is abusive acquisition, while strategic acquisitions with reasonablepurpose by competitors, etc., cannot be blocked. It is unlikely for an acquirer to declare its takeover
action as an abusive acquisition trial. It will not be possible to invoke takeover defense measures only
because the acquirer is a foreigner or a foreign company, either. If a company intend to block strategicacquisitions by foreign companies that have shown fair purposes, because of overseas leakage
concerns, that should be beyond the scope of takeover defense measures.
Meanwhile, takeover defense programs have the aspect of limiting the rights of shareholders. Somecompanies argue that takeover defense measures can be used as “weapons” for negotiating higher
acquisition price, but ultimately whether the TOB price is low or high should be up to theshareholders’ decision, not to the management teams’ decision (the management can just express
its view on the TOB price). Trying to invoke takeover defense measures insisting that the TOB price is
too low, for instance, deprives opportunities for shareholders who believe the TOB price is highenough to take profits. In our view, the idea that takeover defense measures can be used as “weapons”
in price negotiations is very questionable.
In our opinion, takeover defense measures have the aspect of weakening the self-discipline of themanagement team, as they limit the shareholders’ rights to bring about changes in management
teams that have not produced satisfactory achievements. We suspect that there is misunderstanding
among the management teams that they can prevent acquisition proposals which they do not wantto accept, including those with reasonable strategic purposes, by introducing takeover defense
programs. Such misunderstanding should weaken the management team’s sense of tension. To put
it further, introducing or keeping takeover defense measures will lead to investors’ concerns of themanagement’s self-protection, which will also lead to their distrust of the management. Thus, moreinvestors should be inclined to put discounts when evaluating the corporate value of the companies
with takeover defense measures.
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In this way, introducing and keeping takeover defense measures can lower the investors’ confidence
and may depress the evaluation in the capital market. We understand that most listed companies areworking hard to build trust with investors, striving to make more effective disclosure and conducing
IR activities, etc., so that the investors can appropriately evaluate their stocks. However, if a company
tries introducing/keeping a takeover defense measures, it is difficult for us to fully understand it – wefind no clear reason for the company’s decision of introducing/keeping the program, taking majorrisks of lower investor confidence and poorer evaluation in the capital market.
If anything, we may be able to accept the management decision of introducing/renewing theprograms, in the case that the management team recognizes that there are management
issues/challenges, have already started implementing effective reforms, and will still need some moretime before it sees the outcomes to be reflected in fair evaluation of the stock. In such a case, wewould like the management team to clarify the management issues recognized by the team, thereform policies and plans, the goals and target time of achievements, the expected change ofcorporate value when the goals should be achieved, and so forth. If the explanations of these points
are satisfactory enough, we may possibly regard the introduction/renewal of takeover defense
measures with an expiration date as understandable.
(2) Request for clear explanation of takeover defense measures justification
Companies with takeover defense measures have in-detail explanations of the schemes in theirdisclosure materials, but unfortunately their discussions of the necessity of the programs are notsatisfactory for most investors. Many of these companies argue that the measures should prevent
abusive acquisitions such as damaging important management resources and hindering long-termbusiness growth, and that they are effective in securing information-gathering time for shareholders
judgements. As we discussed above, however, these reasons are not convincing from an investor’s
point of view, considering the risk of lowering the stock evaluation in the capital market.
If a company plans to propose renewal of its takeover defense measures at its next AGM, we would
like the management team to clearly explain the following points beforehand, in their proxy voting
related materials and/or timely disclosure materials:-How the management understands the current stock price situation and corporate value
evaluation in the capital market-

What the management thinks about the possible investor confidence decline caused by thetakeover defense measures-

How the management views the balance between benefit and risk of the measures3***We have initiated collective engagement dialogues with multiple companies, with the abovementioned contents. Suggestions, opinions and inquiries are welcome, from investors who haveother engagement agenda ideas, as well as from listed companies’ management teams.

Contact information:
Yuki Kimura (Representative Executive Director and Chairman) / Naomi Yamazaki (RepresentativeExecutive Director and Administration Manager) / Ryusuke Ohori (Executive Director)
Institutional Investors Collective Engagement Forum
Tokyo Entre Salon, Shinmaki-chou Building Annex 1, 2nd floor, 3-2-14, Nihonbashi, Chuo-ku, Tokyo
103-0027 Japan(E-mail) info@iicef.jp

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