Doing Deals in Japan: An Analysis of Recent Trends and Developments for the U.S. Practitioner

Abstract

Japanese deals are back. During the so-called “lost decade” of the 1990s when Japanese banks were saddled with non-performing loans and Japanese companies posted minimal earnings growth, it seemed as though the Japanese economy was left out of the globalization trend that was sweeping across western economies and much of the developing world. Perhaps lost in the shuffle of the tech boom, the fallout from Enron and WorldCom, the passage of the Sarbanes-Oxley Act of 2002 and the subsequent rules issued by securities regulators, the investigations by New York Attorney General Eliot Spitzer and the Securities and Exchange Commission into the recommendations made by certain securities analysts, and the market timing abuses committed by some mutual funds–on top of the grave concerns arising in a post-September 11 era–there was little time left to discuss the critical changes that were taking place in the world’s second largest economy. Although some companies and investors took another look at Japan somewhat earlier in the business cycle (and have consequently reaped the benefits of such investments), only recently have the numbers come back to generate renewed interest across the market. The numbers have come back big. According to Thomson Financial, in 2005 the total number of Japanese deals was 2552–second only to the United States– resulting in total deal volume exceeding $167 billion–third in the world following the United States and the United Kingdom. Japanese deals were up 109.2% in 2005 from their 2004 levels, while the United States and the United Kingdom were up 33.3% and 15.6%, respectively. Although Japanese deals may still account for a smaller percentage of the overall Japanese economy when measured against comparable figures in many western economies, there is little doubt that the trends are up. Indeed, Thomson Financial concluded that “Japan proved a hot market in 2005, far outpacing growth in the United States, the United Kingdom, and Australia.” This article examines the process that is currently being played out in Japan by: (i) analyzing the recent changes in Japanese law of relevance to M&A deals; (ii) discussing some recent contested deals in Japan that may shed light on current market practices; and (iii) providing an overview of the key issues that a U.S. practitioner will likely face when working on a Japanese deal. While this analysis is by no means an exhaustive or comprehensive treatment of the subject matter, hopefully it will provide insight into the changes that are taking place in Japan, while also noting future developments that may, to some degree, be anticipated.