Academic journal article Washington International Law Journal

The Nireco Poison Pill: The Impact of a Court Injunction

Academic journal article Washington International Law Journal

The Nireco Poison Pill: The Impact of a Court Injunction

Article excerpt

Summary: The much heralded arrival of the corporate hostiletakeover era in Japan has prompted a variety of responses from Japan's legislature, bureaucracy, and business sector. Among these responses was what could have been Japan's first poison pill, an issuance of stock purchase warrants approved by Nireco Co.'s Board of Directors as part of a shareholder rights plan. However, concerns over potential harm to Nireco shareholders due to structural flaws in the poison pill prompted a court battle and ultimately led to a judicial order preventing the issuance. This paper seeks to uncover the substantive aspects of the Nireco case by examining the various legal issues it raised and its potential impact on the future of corporate defensive measures in Japan.

Table of Contents

1. The Nireco Poison Pill

2. The Investment Fund's Petition for an Injunction

3. The Tokyo District Court Decision

4. The Main Purpose Rule: Extending the Conventional Rubric

5. Reasonable Defensive Measures

6. Harm to Shareholders

7. The General Shareholder Meeting

8. Epilogue


(1) On March 14, 2005, in the midst of a highly publicized battle between Livedoor, Inc. and Fuji Television Network, Inc. over managerial control of Nippon Broadcasting Systems, and directly after a decision by the Tokyo District Court enjoining Nippon Broadcasting's Board of Directors from issuing stock purchase warrants to dilute Livedoor's ownership,1 Nireco Co. ("Nireco") publicly announced its own decision to issue stock purchase warrants under a shareholder rights plan.2 This so-called "poison pill" if realized, would become the first of its kind in Japan.

(2) The following is a general outline of the poison pill adopted by the Nireco Board of Directors:

1. Nireco will allocate two gratuitous stock purchase warrants for each Nireco share held by shareholders of record as of March 31, 2004.3

2. The stock purchase warrants are non-transferable and non-assignable.

3. Upon a determination by the Nireco Board of Directors that a hostile bidder had sought to acquire twenty percent or more of the corporation's outstanding shares, shareholders who have received the stock purchase warrants can exercise them to acquire Nireco shares at a cost of 1 yen per share.

4. The Nireco Board of Directors has the authority to redeem or refuse to redeem the stock purchase warrants. In making this decision, the Board of Directors will respect the recommendation of a special committee comprised of three outside experts; however, situations in which the committee's recommendation is not followed also are possible.

5. The Board of Director's refusal to redeem the stock purchase warrants is limited to the following circumstances:

i. The acquirer is a greenmailer;

ii. The acquirer is planning a scorched earth policy;

iii. The acquirer is planning a leveraged buyout;4

iv. The acquirer is a corporate raider planning to resell the corporation to the highest bidder;5

v. Other situations, such as where there is an obvious threat of harm to the corporate value of the Nireco group, including but not limited to existing Nireco shareholders, business affiliates, customers, employees, regional companies, or other stakeholders.

(3) Since a stock purchase warrant generally is not transferred along with the share to which it was allocated and individual assignment of the warrant is prohibited under the terms of Nireco's poison pill, potential acquirers have no way to obtain any stock purchase warrants after they have been allocated; they are limited to an acquisition of shares already outstanding at that moment. Thus, even if a prospective acquirer obtains twenty percent or more of the corporation's outstanding shares, his or her share ownership could be diluted to one-third if and when the stock purchase warrants are exercised to acquire new shares. Accordingly, any potential acquirer would have no choice but to request the target management to redeem the stock purchase warrants before reaching twenty percent ownership of the outstanding shares and hope that the target management responds favorably by agreeing to partake in acquisition negotiations. …

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