The Poison Pill in Japan: The Missing Infrastructure

Abstract

The coming of hostile takeovers to Japan has been anticipated, and anticipated, and anticipated. Each report of a reduction in the size of crossholdings among Japanese companies and in the size of Japanese bank stockholdings in their clients has given rise to an expectation that now, at last, hostile offers would emerge. It is not surprising that commentators looked forward, optimistically, to the arrival of a potentially disruptive takeover technique. The extended Japanese recession, together with management resistance to internally implemented restructurings and the barriers to externally imposed restructurings, has created the potential for substantial private and social gain from rationalizing production. Nonetheless, in Japan the much anticipated hostile takeovers did not materialize. In turn, the absence of takeovers resulted in little clamor for defensive tactics; without a threat on the horizon, no demand for protection developed. A number of events now suggest that the long wait for hostile transactions in Japan may be approaching its end. The combination of crossholdings, bank holdings and governmental stasis that has frozen Japanese corporate governance leaves hostile takeovers as one of the few external mechanisms for systemic change that existing institutions do not block or at least greatly impede. Most important, the institutional infrastructure that ultimately reduced the defensive impact of the poison pill in the United States does not now exist in Japan. Thus, the poison pill has the potential to be greatly more pernicious in Japan than it has been in the United States, both because of the absence of ameliorating institutions in Japan, and because the impact is likely to be greater because in Japan the forces for change in industrial organization outside the market for corporate control are significantly less strong than in the U.S.