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Asia Pacific
April 2004
Number 2/2004
In This Issue:
Australia – Incorporated Limited
Partnerships Now Eligible for VCLP Tax Relief
Victoria Leads with New Limited Partnership
Legislation
China – SAT to Clean Up Development Zone
Tax Policies
‘Electronic Information Products’ to Comply
with New Environmental Regulations
New Zealand – New Zealand Venture Capital
Incentives
Philippines – New Implementing Rules and
Regulations for the Securities Regulation
Code
Singapore – Regulation of Business Trusts
in Singapore
Profile – Hiroshi Kondo
www.bakernet.com
©2004 Baker & McKenzie
All rights reserved.
Venture Capital /Private Equity
Newsletter
AUSTRALIA
Incorporated Limited Partnerships Now Eligible
for VCLP Tax Relief
In the United States and Europe limited partnership structures (LP) have longbeen the favoured form of investment vehicle for venture capital and private equityinvestors. LP in several overseas jurisdictions are effectively accorded their ownseparate legal status in the same way as a company has its own legal status separatefrom its members.
Until recently in Australia an LP’s status as a partnership or a company has beenunclear and this has led to several uncertainties regarding its tax treatment.However, an announcement by Senator Coonan in December last year confirmedcertain favourable amendments to the tax law that should better align Australia’stax treatment of LPs with international best practice in the field.
Previously incorporated LP (ILP) were not registrable as either venture capitallimited partnerships (VCLP) or Australian venture capital fund of funds (AFOF)under the Venture Capital Act 2002 and therefore they were unable to access therecently introduced tax concessions for certain overseas venture capital andprivate equity investors. The amendments now allow ILP to be registered as VCLPand AFOF and therefore to be taxed as ‘flow through’ vehicles.
A transitional rule will allow the registration of an ILP as a VCLP or an AFOF to bebackdated if the ILP has separate legal entity status and it otherwise meets therequirements for registration.
Victoria Leads with New Limited Partnership
Legislation
Victoria is the first State to move to a more modern and investor-friendly limitedpartnership framework. The changes were made under the Partnership (VentureCapital Funds) Act 2003 (‘the Act’) and came into effect on 3 December 2003. Thenew provisions are now set out in Part 5 of the Partnership Act 1958.
In the May 2003 edition of Private Equity Update we highlighted several areas ofconcern with using the existing State-based limited partnership legislation inAustralia. Given the recent changes we thought it worthwhile to recap thoseconcerns and see how they have been handled.
• A lack of mutual recognition. Now dealt with by providing for therecognition of the limitation of liability of partners in incorporated limitedpartnerships formed under a law of another jurisdiction (i.e. another State,
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Territory or country) for liabilities incurred in the State,provided that law is a ‘corresponding law’. The Governorin Council may declare ‘corresponding laws’ or they canbe listed in the Act. A corresponding law may only bedeclared if, in relation to another Australian law, thecircumstances giving rise to the limitation of liability inthat other jurisdiction would also give rise to the samelimitation in Victoria, or in relation to a foreign law, only ifthat law provides for the limitation of liability of certainpartners in certain partnerships.
• A limited partnership not being recognised as aseparate legal entity. The Act now specificallyprovides for incorporated limited partnerships (ILP).This means that ILP will be bodies corporate each withits own legal personality, perpetual succession and theright to sue and be sued.
• The Commonwealth/State law over-ride whereinconsistencies occurred. Concerns that previouslyexisted about the extent of limited liability for limitedpartners where there were breaches of Commonwealthlegislation (eg. the Trade Practices Act) should now havebeen removed with the introduction of separate legalstatus for limited partnerships established in Victoria.
• A lack of clarity as to whether the limitation ofliability of limited partners covered allobligations and liabilities of the limitedpartnership (not just contractual obligations).The Act now defines ‘liability’ in such a way as to coverany ‘debt, obligation or liability of any kind, wherever andhowever incurred’. This should address the previousuncertainty.
• Limited partners participating in certain‘accepted’ aspects of a limited partnership’saffairs without becoming liable for the debts andobligations of the partnership. The Act nowprovides for a number of very sensible ‘safe harbouractivities’ that limited partners can rely upon without fearthat those activities somehow amount to taking part inthe management of a partnership’s business. Also, theacts of a limited partner will only bind the partnership(and the limited partner) if those acts would be bindingon the partnership if carried out by the general partner ofthe partnership and the person to whom the liability wasincurred ‘reasonably believed’, having regard to thelimited partner’s conduct at the time, that the limitedpartner was a general partner of the partnership.
• Clarification regarding the principles of agencyas they apply to limited partnerships. The Act hasalso sought to remove this issue by expressly providingthat neither a general partner, the partnership, nor anofficer, employee or agent of the partnership is the agentof a limited partner, nor do their acts bind the limitedpartner; and a limited partner is not an agent of a generalpartner or of a limited partner of the partnership, nor dothe acts of the limited partner bind them.
(For a copy of the May 2003 edition of Private Equity Update,please contact Nicole Martinez at tel: (612) 9225 1520, or e-mail her at [email protected])
Mark McNamara (Sydney)Tel: (612) 9225 0277
CHINA
SAT to Clean Up Development Zone Tax Policies
On 16 January 2004, the State Administration of Taxationissued the Notice Concerning Cleaning Up and Examining TaxIncentive Policies in Development Zones (Guo Shui Fa [2004]No. 9). Tax Notice 9/2004 urges tax bureaus at variouslevels to clean up tax incentive policies and practices indevelopment zones that are inconsistent with national taxrules. Although the notice does not specifically target taxincentives available to foreign-invested enterprises, it hassignificant ramifications for tax planning by foreign investorsin China.
Tax Notice 9/2004 has an immediate impact on howforeign-invested enterprises registered in development
zones should file their 2003 enterprise income tax returns,due by April 2004. In the longer term, Tax Notice 9/2004will affect the ability of foreign-invested enterprises tocontinue enjoying local tax incentives, and may even have aretroactive effect on their tax positions in prior years.
Foreign investors should re-evaluate the tax benefits offeredby local governments. If local tax incentives were key to thechoice of location of a foreign-invested enterprise, the basisfor the investment decision may have changed. For foreigninvestors in the planning stage, Tax Notice 9/2004 levelssome of the advantages that certain development zonesoffered over competing locations. Tax Notice 9/2004
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requires rectification of the following practices:
• By national level development zones:
a) Extending tax incentives to enterprises registered in adevelopment zone but operating outside the zone;
b) Granting tax incentives intended for newly establishedenterprises to other enterprises;
c) Without authority, enlarging the availability, amountand duration of tax incentives.
• All forms of tax incentives by provincial leveldevelopment zones that exceed provincial governmentauthority, including tax incentives that should be availableonly in a national development zone;
• All forms of tax incentives by development zonesestablished by lower than province level governmentswithout higher authorization, including tax incentivesthat should be available only in a national or provinciallevel development zone.
NEW ZEALAND
New Zealand Venture Capital Incentives
‘Electronic Information Products’ to Comply with New Environmental
Regulations
Investors of companies engaged or to engage in theproduction, sales or import of electronic and informationproducts should take note of the Measures on theAdministration of Preventing the Pollution by ElectronicInformation Products issued by the Ministry of InformationIndustries, and effective from 1 January 2005. The Measuresapply to electronic and information products such aselectronic radar products, electronic communicationsproducts, radio and video products, computer products,household electronic appliances, electronics testingproducts, electronic specialized products, electroniccomputer products, electronic application products andelectronic material products. The Measures do not apply toelectronic and information products produced directly forexport or to the sale of products with original manufacturerlabeling, although the scope of this exemption is not yetclear.
In view of the Measures, manufacturers must take measuresto gradually reduce and eventually eliminate the use of lead,mercury, cadmium, sexavalent chromium, PBB, PBDE, andother harmful substances. If any of these substances cannotbe completely eliminated, their use must not exceed levelsset by national standards. The grace period for continued useof the six substances will end on 1 July 2006. In order tofacilitate the implementation of the Measures, the Ministryof Information and Industry will issue further guidance inthe form of industry standards on the prevention of thepollution of electronic and information products, keyelectronic and information products catalogue andelectronic and information pollutants.
Andrew Tan (Hong Kong)Tel: (852) 2846 1910
New Zealand has been spurred on to adopt more investorfriendly policies for fear that it is lagging behind Australia inthe investment stakes.
In 2001 the New Zealand Government introduced theVenture Investment Fund (2001) to accelerate thedevelopment of the venture capital market by increasing thesupply of seed, start-up, and early expansion investment inNew Zealand. It was however only designed as a temporaryinitiative and the Government is now looking to followAustralia with the introduction of an internationallyrecognised venture capital limited partnership structure.
The New Zealand Minister of Revenue, Michael Cullen, hasannounced proposals to amend the New Zealand Income Tax
Act to create a tax environment for venture capital that issimilar to the Australian one. In particular, it is proposed toprovide certain tax-exempt non-resident investors with a taxexemption for venture capital investments in New Zealand,and to remove certain tax barriers that may prevent thespecial partnership rules from being used in the venturecapital context. The changes should also remove the taxbarrier to resident partners investing alongside non-residentpartners. Other initiatives announced include a proposedpolicy to exempt from tax the profits from the sale of shareswhen investors are exempt from tax in their ownjurisdiction.
These exemptions will be available to residents of the
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majority of countries with which New Zealand has a doubletax agreement and it is proposed that the exemptions willonly be available for equity investments in small, unlisted
PHILIPPINES
New Implementing Rules and Regulations for the Securities Regulation
Code
New Zealand resident companies that are not involved incertain excluded activities.
Mark McNamara (Sydney)Tel: (612) 9225 0277
The Philippine Securities and Exchange Commission (SEC)recently issued the new Implementing Rules andRegulations (IRR) of the Securities Regulation Code (SRC).The IRR became effective on 28 February 2004 and wasissued to implement significant changes in the SEC'sregulation of securities transactions and the capital market.We highlight some of the changes below.
Expanded Definition of Public Offering
The IRR expands the definition of a 'public offering' ofsecurities. Under the new IRR, any presentation of securitiesfor sale through the media is considered a public offering,including the following:
• Publication in any newspaper, magazine, or printed readingmaterial which is distributed within the Philippines or anypart thereof ;
• Presentation in any public or commercial place;
• Advertisement or announcement in any radio ortelevision, or in any online or e-mail system;
• Distribution or making available flyers, brochures or anyoffering materials in a public or commercial place, ormailing the same to any prospective purchaser.
Exempt Securities
Securities offered for sale must be registered with the SEC,unless they are exempt from registration under the SRC orthe IRR. The new IRR expands and clarifies the coverage ofthe exemptions from registration of securities. Except for itsown shares of stock, a financial institution licensed by theBangko Sentral ng Pilipinas (BSP) to engage in quasi-bankingactivity does not have to register its issued securities.Further, registration requirements will not apply to any ofthe following:
• Debt instruments issued to the BSP under its openmarket and/or rediscounting operations;
• Debt instruments issued to primary institutional lenders,
such as banks, venture capital corporations, trustcompanies, investment houses, financing companies,investment companies, pre-need companies andinsurance companies;
• Bills of exchange issued pursuant to a bona fide sale ofgoods and services.
Reporting Requirements
The new IRR increases the disclosure responsibilities ofreporting companies. If a news item appears giving an accountof an alleged material event, the concerned company mustsubmit to the SEC a report within a prescribed period in orderto clarify the news item and forestall public speculation.
Further, a disclosure released to the mass media orsubmitted to the SEC, made in the personal capacity of anofficer or substantial stockholder of the issuer, will beconsidered an official report of the issuer if it does not denythe disclosure within two days from its release orsubmission. Any misleading statement, misrepresentation,or omission of a material fact in the disclosure will be thejoint responsibility of the issuer and the person that made thedisclosure.
In addition, the SEC may require an owner of more than 5%of the voting stock of a listed company to disclose anymaterial information he possesses within a prescribedperiod.
Tender Offers
Under the new IRR, a buyer must make a tender offer only ifhe intends to acquire at least 35% of the stock of a publiccompany. Note that the SRC provides for a lower thresholdof 15%.
Under the SRC, a person who intends to acquire at least 15%of the stock in a public company, or at least 30% in a 'creepingacquisition' over the course of 12 months, must make atender offer to all stockholders of the public company.However, shortly after the SRC was passed on 19 July 2000,
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it was observed that this provision unduly restricted themarket. The burdensome requirements of a tender offer hadto be complied with even for relatively small transactions,which did not result in a change of control. Hence, the newIRR provides for a threshold amount of 35%.
The IRR provides that the sale of the shares covered by aprivate transaction cannot be completed unless the tenderoffer has commenced. For creeping transactions, the lastsale meeting the threshold cannot be consummated unlessthe tender offer has commenced.
In addition, under the new IRR, additional transactions havebeen exempted from the rules on tender offer, including thefollowing:
• Purchase of shares from the unissued capital stock,provided that the acquisition will not result in a 50% ormore ownership of shares by the purchaser;
• Merger or consolidation.
Requirements on Independent Directors
Under the IRR, registered issuers and public companies musthave independent directors. The IRR prescribes thequalifications, number, nomination and election, andtermination of independent directors. Independent directorsmust number at least two, or at least 20% of the board,whichever is lesser. One of the qualifications for anindependent director is that he must not hold more than 2% ofthe shares of the corporation, or of its related companies, orany of the corporation's substantial shareholders. Further, thedefinition of directors not considered independent has beenexpanded to include any professional adviser of the registeredissuer or public company, retained personally or through hisfirm.
Pearl T. Liu (Manila)Tel: (632) 819 4905
Jocelyn Gregorio-ReyesTel: (632) 819 4946
SINGAPORE
Regulation of Business Trusts in Singapore
The Monetary Authority of Singapore (MAS) published aconsultation paper on a proposed regime to regulatebusiness trusts (BTs) in Singapore on 10 December 2003.The consultation paper, alongside a draft Business Trust Bill,was the product of an in-depth study by various parties fromthe Ministry of Law, the Ministry of Finance, the Registry ofCompanies and Businesses and the MAS.
What is a BT?
BTs are essentially businesses structured in the form of trustsinstead of corporations. The trustee of the BT has legalownership of the assets of the underlying business in itscapacity as a trustee. Investors take on beneficial ownership ofthe trust assets by acquiring units in the trust. Unit-holders aregranted economic benefits in the form of dividends paid out bythe BT. BTs are different from collective investment schemes(CIS) (which are currently regulated under the Securities andFutures Act (SFA) and the Code on Collective InvestmentSchemes) in that they are not passive investment vehicles butare vehicles which actively undertake business activities.
Advantages of a BT
In countries such as the United States, BTs have becomepopular because they combine the following benefits:
• BTs can distribute profits from operation’s cashflow. By comparison, conventional companies can onlypay dividends out of profits.
• Limited liability. Unit-holders’ liability will be limitedsuch that they will not incur any personal liability forobligations of the BT.
• Favourable tax treatment. The Singapore governmenthas not disclosed its proposed tax treatment for BTs. Inother jurisdictions, the BT structure avoids the problem ofdouble taxation (e.g. income taxes on corporate profits andthen income taxes on dividends paid to shareholders).
Types of businesses likely to benefit
Businesses with stable growth and high cash flow. Typicalexamples would include companies in sectors such asinfrastructure, utility and real estate. These companies oftenhave high cashflow, but are unable to distribute largedividends due to depreciating assets. Restructuring as a BTwill make these companies more attractive to investors.
Regulation of BTs - Key Proposals
The key proposals under this new regulatory regime for BTsinclude:
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• Registration regime. The draft bill proposes that allBTs which offer units to the retail public, except trustswhich are authorised or recognised as a CIS under theSFA, have to be registered as a BT under the regulatoryregime. Any other BTs may voluntarily registerthemselves under this regime.
• Structure of BTs. The roles of the trustee and managerwill be undertaken by a single entity - the ‘trusteemanager’ (TM) who will have the dual responsibilities ofsafeguarding the interests of the unit-holders andmanaging the BT. This model of management ensures thatonly one entity is clearly liable for any actions and there isno need to apportion fiduciary responsibilities betweenthe trustee and the manager. It is also proposed that thetrustee manager must be a public company incorporatedin Singapore. As a public company, it will be mandatoryfor the TM to prepare audited financial accounts and thiswill in turn be available to the unit-holders.
• Duties and liabilities of the TM. The fiduciary dutiesowed to the shareholders of the TM to manage the trustcompany may conflict with the fiduciary duty owed to theunit-holders of the BT to act in the best interests of theunit-holders. The draft bill thus proposes that a numberof measures to address this issue including prescribingstatutory duties on the TM (which are not unlike thoseimposed on directors of companies), providing for a dutyon the TM to form an audit committee and imposingmandatory requirements on the independence of theboard of the TM.
• Rights of Unit-holders. Under the draft bill, unit-holders are given voting rights on significant matters suchas the appointment of a new TM, the appointment andremoval of the auditor, the approval of the issue of newunits and the approval of material interested partytransactions.
• Rights of Creditors. Creditors of the BT can claimagainst the assets of the BT only via the TM’s right ofindemnity on trust assets, provided that the TM has actedproperly in the incurrence of the liability. This proposal isconsistent with the position at law that a trust is not aseparate legal entity and is also aligned with current caselaw on creditors’ rights against trusts.
• Winding-up and Insolvency. The winding-up of a BTcan be initiated in the following ways:
a) The court may order a winding-up of the trust if it isjust and equitable to do so, on the petition of the TM,a unit-holder, or the Minister of Finance.
b) The court may order a winding-up on the applicationof a creditor, if within three months before theapplication for the order, an execution was issued onan order of court in favour of a creditor and theexecution has been returned unsatisfied.
c) Unit-holders can vote to wind up a trust, subject to aspecial resolution. i.e. when a resolution has beenpassed by not less than three-fourths of the unit-holders.
d) TM may wind up the BT in accordance with theprovisions of the Trust Deed.
Conclusion
The move by the Singapore government to recognize andregulate BTs is a welcome one. It creates certainty and addsdepth to the Singapore capital market, thereby bringing itfurther in line with other developed financial markets.
Boo Bee Chun (Singapore)Tel: (65) 6434 2618
PROFILE
Hiroshi Kondo
Partner, Tokyo Office.
Hiroshi Kondo is a Partner based in the Tokyo office (TokyoAoyama Aoki Law office/Baker & McKenzie). A graduateof Harvard Law School, he specializes in handling Mergersand Acquisitions, Private Equity Investment, Corporate/Commercial, and Labor Law, and heads the M&A PracticeGroup. Hiroshi has acted as lead counsel for several highprofile M&A transactions in Japan in the
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telecommunications, insurance and retail markets, and hasextensive experience in the areas of private equityinvestment (in particular, management buyouts andleveraged buyouts), corporate restructuring, securitiesregulation, anti-monopoly regulation, and labor disputeresolution.
Here, Hiroshi shares with us his experience and insights onthe private equity/venture capital scene in Japan.
1. Please tell us something about the Tokyo office’sVC/PE Practice Group, and in particular, yourexperience with VC/PE transactions.
I head the Tokyo office’s M&A and VC/PE Practice Groups.The VC/PE practice group comprises four partners andseveral associates with venture capital and private equityinvestment experience.
The Tokyo office team has acted for a number of leadingventure capital and private equity firms in Japan, includingJAFCO and Tokio Marine Capital. My colleagues and I havealso acted as Japanese counsel in a number of cross-borderand multi-country deals involving foreign private equityhouses. In the last few years since private equity investmentand acquisition finance transactions started to take place inthe Japanese market, we have advised on well over a dozensuch transactions.
In one of our leading transactions, last year, we advisedTokio Marine Capital on its investment in the Wanbishi deal,Japan’s largest ever MBO with a price tag of about US$475million. The deal was a complex private rehabilitationtransaction involving nearly 20 banks (domestic andforeign owned).
2. There seems to have been few deals coming outof Japan, although these have involved somehigh profile transactions and in previouslyregulated sectors. Do you see a continuation ofthis trend? What are the greatest challengesfaced by VC/PE investors in Japan ?
Five years ago, Japan did not have a private equity industry.Today, according to a recent industry survey, there are some35 firms that have raised just over 1.2 trillion yen (US$10billion) for private equity investments in Japan.1
The VC/PE industry in Japan includes the so-called‘independent’ funds and the ‘financial’ funds, i.e. domesticfunds affiliated with major Japanese financial institutions.
Leading independents include funds such as JAFCO,Unison Capital, Phoenix Capital and MKS Consulting, thelatter itself becoming independent as a result of amanagement buyout from the Schroder group. Leading
financial funds include Mizuho Capital, Nomura PrincipalFinance and Shinsei Capital.
Venture capital funds and corporate funds are alsosignificant players in the market. Leading venture capitalplayers include veteran JAFCO and Tokio Marine Capital,the latter grabbing headlines earlier this year when it co-invested with Nomura Principal Finance in Japan’s largestever MBO, a US$475 million management buyout of theWanbishi archives business.
Notwithstanding the departure in 2003 of leadingEuropean fund 3i, foreign funds are also becoming moreactive in the market. Leading foreign players includeRipplewood Holdings, which again made headline newsthis year when it partially exited one of its first investmentsin Japan, namely in Shinsei Bank, through an IPO on theTokyo Stock Exchange. In 2003, Ripplewood announced aUS$2.2 billion leveraged buyout of Vodafone’s fixed-linebusiness in Japan, its eighth deal in Japan in three years. Thisdeal was widely reported as Japan’s largest ever LBO. TheCarlyle Group is also an active player.
One of the biggest challenges facing the foreign funds iscoming to grips with Japanese society and business culture,perhaps more so than for strategic investors. Kao’s recentattempt to acquire Kanebo highlights how important theseconsiderations can be. Kanebo runs several business lines,including cosmetics, apparel, pharmaceuticals, food, and soon. However, only the cosmetics business line wasprofitable. Kao, another Japanese company engaged in asimilar business but more successfully, attempted toacquire Kanebo’s cosmetics business by way of a spin-off.Under this scenario, Kanebo planned to revitalize its otherbusiness lines using the proceeds from the sale of itscosmetics business. The scheme made the most financialsense to the public. However, just before the parties weredue to sign the deal, Kanebo’s labor union mounted aresistance campaign on the basis that some employeeswould end up working for a non-cosmetics business unit.Kanebo walked away from talks with Kao and approachedthe Industry Revitalization Corporation of Japan (IRCJ).The IRCJ is a government-funded organization whosemission is to rescue and revitalize distressed companiesusing taxpayers’ money. The IRCJ declared that they wouldprovide a rescue package covering all of Kanebo’s businesslines. However, from the public’s perspective, the deal didnot make sense.
1 Nihon Keizai Shimbun, August 20, 2003
Partners
Richard Lustig, Melbourne, Australia
Tel: (61-3) 9617 4433
Mark McNamara, Sydney, Australia
Tel: (61-2) 9225 0277
Bing Ho, Beijing,
People’s Republic of China
Tel: (86-10) 6505 0591 ext. 224
Danian Zhang, Shanghai,
People’s Republic of China
Tel: (86-21) 5047 8558 ext. 1617
Stephen Nelson, Hong Kong / Beijing,
People’s Republic of China
Tel: (852) 2846 1923
Poh Lee Tan, Hong Kong SAR
Tel: (852) 2846 1903
Mark C. Innis,Hadiputranto, Hadinoto & Partners*,
Indonesia
Tel: (62-21) 515 4925
Hiroshi Kondo, Japan
Tel: (81-3) 5157 2761
Michael J. Madda, Palo Alto
Tel: (650) 856-5550
Brian Chia, Wong & Partners*,
Malaysia
Tel: (60-3) 2055 1999
Pearl T. Liu,
Quisumbing Torres**, Philippines
Tel: (63-2) 819 4905
Wong Ai Ai,
Baker & McKenzie.Wong & Leow,
Singapore
Tel: (65) 6434 2553
Wong Kien Keong,
Baker & McKenzie.Wong & Leow,
Singapore
Tel: (65) 6434 2688
Kang Wen-Yen, Taiwan
Tel: (886-2) 2715 7207
Kitipong Urapeepatanapong,
Thailand
Tel: (66-2) 636 2000
ext. 3775 or 3776
Frederick Burke, Vietnam
Tel: (84-8) 823 6238
* A Correspondent Firm
** An Affiliated Law Firm
This Update has been prepared for clients and professional associates of Baker &
McKenzie. Whilst every effort has been made to ensure accuracy, this Update is not
an exhaustive treatment of the areas of law discussed and no responsibility for any
loss occasioned to any person acting or refraining from action as a result of material
in this Update is accepted by Baker & McKenzie.
Data Privacy
Please contact Michelle Tan by telephone (65) 6434-2590 or e-mail:
[email protected] should you wish your details to be added or deleted from our
mailing list.
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In terms of deal flow, private equity deals are probably running at about 50 dealsa year. Currently, MBO type investments in distressed companies undergoingformal civil rehabilitation (i.e., a pre-packaged deal with DIP finance) or aprivate rehabilitation process are very active. MBOs in this field have beendescribed as ‘the only measure that can rescue the Japanese economy’! The civilrehabilitation process is much more easy, stable and foreseeable than the privaterehabilitation process. However, it can take several months to complete, duringwhich the target business may suffer significant deterioration. The privatebankruptcy process is more informal but typically requires an extremelyburdensome consensus building process (nemawashi) among creditors, equityinvestors, and management. The private process may require a very Japaneseapproach in order to work. Foreign funds may not be equipped to deal with thiskind of work.
Finally, as a new development, we have witnessed very recently several attemptsat hostile takeovers of Japanese firms by funds such as Steel Partners (foreign)and Murakami Fund (local). These funds have been targeting mid-sizedJapanese publicly listed companies with large amounts of surplus profit surplusand asking them to issue more dividends. If the target declines the request, thefunds declare a hostile takeover (or instigate a proxy battle at the target’sshareholders meeting). To date, neither the hostile takeover nor the proxybattle has proved useful in Japan. While Japanese traditional ‘keiretsu’shareholding are gradually melting down, relationships between the target’smanagements and the primary banks continue to pose challenges for foreigninvestors (banks are usually substantial shareholders who wield a lot ofinfluence over other shareholders). Nonetheless, these hostile takeovers havebeen viewed by the Japanese business community as a kind of second coming ofPerry’s black ships, i.e. only the beginning of what is likely to be an ongoingtrend in Japanese corporate takeovers.
3. There now appears to be spurts of economic growth in manyareas. Will we be seeing more VC/PE activity and furtherderegulation of more sectors of industry? What opportunities doyou see for VC/PE investors in Japan?
Private equity players do not appear to be looking at particular sectors. Rather,they are saying that they are looking at ‘new business’. However, we do foreseethat the following business sectors will likely continue to be actively targetedfor private equity investments:
• Pharmaceutical
• Logistics
• Healthcare
Hiroshi Kondo can be contacted at Tel: (813) 5157 2761, or
e-mail: [email protected]
