The manager of Norway’s NOK14.7trn (€1.32trn) sovereign wealth fund has criticised Japan’s new guidelines for corporate takeovers saying they leave room for bids to be rejected without comeback from shareholders.
Norges Bank Investment Management (NBIM), which runs the Government Pension Fund Global (GPFG), made the remarks in its response to Japan’s Ministry of Economy, Trade and Industry (METI) consultation on draft rules designed to foster a healthy mergers and acquisitions (M&A) market - in a country where firms are seen as reluctant to countenance unsolicited takeovers.
In the letter to METI, Carine Smith Ihenacho, NBIM’s chief governance and compliance officer, and Elisa Cencig, senior ESG policy adviser said they welcomed the ministry’s work to encourage acquisitions that resulted in a healthy M&A market, and to improve predictability both for parties involved in acquisitions and broader capital market participants.
But the pair also said: “We find the definition of ‘corporate value’ underpinning the Board’s assessment of an acquisition offer somewhat unclear.
“In particular, we query why the wording of the guidelines implies that corporate value and shareholders’ interests can be in contrast with each other, as we believe that shareholders’ interests are aligned with maximisation of corporate value.”
Additionally, the NBIM pair said the draft contained no transparency obligation on the Board’s assessment of corporate value, which could encompass a subjective judgment and should be disclosed to shareholders to facilitate accountability.
The definition of corporate value as a sum of discounted cash flows relied on a company board’s opinion of what the future cashflows might be, but boards might not have the incentive to be realistic in their assessment, they said.
“A takeover approach could therefore be rejected without challenge on the sole basis of the Board’s opinion on corporate value, with no recognition that the value of a takeover encompasses a portion of the strategic elements and net synergies that the acquirer gains as part of the acquisition, and not only the current NPV of the target company’s cash flows,” the NBIM women said.
Among the many other points NBIM made regarding the draft guidelines, it said acquisition offers should only be submitted to independent directors - those that were independent of both parties involved in the acquisition and the success or failure of such acquisitions.
“This would reflect common market practice and avoid conflicts of interests driving the perception of the entire Board,” the pair wrote, saying they believed it would not be too hard to set up special committees of such independents, and that this should be required in all cases.
Back in April when the guidelines were being drawn up, Genta Ando, METI’s corporate system division director, told Reuters the ministry was eager to compile guidelines that would make sense to people in capital markets.
“One factor impeding M&A within Japan is a general reluctance toward unsolicited takeovers,” he said, adding that many domestic companies were afraid of reputational risk - being seen as predatory - and that clearer guidelines could alleviate that, Ando said, adding that this attitude was hampering industry consolidation and appropriate distribution of resources.
Japan constitutes the GPFG’s second largest equities allocation by country after the US, accounting for 7.3% of the SWF’s equities at the end of 2022. In turn, equities make up around 70% of the giant fund, which only invests outside the Nordic Region.
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