Triangular Mergers Introduced in Japan
New rules introduced in May will allow so-called sankaku gappei, or triangular mergers. These will permit a foreign firm with a Japanese subsidiary to acquire a Japanese company by having it merge with the Japanese sub. In this post I will discuss some background and details; in a follow-up post, I'll talk about the possible effects of the new law on Japanese business and investors.

As described in a brief paper by the Pillsbury law firm, formerly a foreign firm could use as consideration only shares of its sub to buy a Japanese company, which was impractical because this stock was rarely publicly traded. Now acquirors will be able to use cash, bonds, and other assets, including shares of the foreign parent. The new rules will apply to other reorganizations, such as stock swaps where the acquired company remains a sub of the foreign subsidiary.

The new rules are intended to raise foreign direct investment in Japan. According to the Japan Times, Japan wants to raise the proportion of foreign investment in GDP to 5% in 2010 from 2.2% in 2005.

But the new rules have met with opposition from Japan's business community. Originally intended to be introduced in 2006 following passage of a revised Company Law in 2005, implementation was postponed for a year. The Japan Business Federation (the Keidanren) continues to oppose the new rules and has been working to introduce rules that would make it more difficult to carry out triangular mergers.

In general, the new rules have added to the anxiety about M&A in Japan. According to the Times (London), at this year's round of shareholder meetings some 200 Japanese management teams will be proposing "...antitakeover strategies, including poison pills, golden shares and so-called advance-warning systems (AWSs)."