Tokyo Stock Exchange Tightens Rules on MBOs and Controlling Shareholder Buyouts: Enhanced Disclosure and Minority Protection

II. Background: Value Pressures and the Rise of MBOs and Controlling Shareholder Buyouts in Japan

Japanese listed companies have been under increasing pressure to boost capital efficiency and share prices in recent years. In 2023, the TSE explicitly called on listed companies to pursue “management that takes into account capital costs and stock prices,” signaling that chronically low valuations would no longer be ignored. This push reflects a broader governance shift toward medium- to long-term corporate value creation, and one consequence of these pressures has been a surge in going-private transactions, including MBOs and parent-subsidiary consolidations. At the heart of the revisions to the Code is a recognition of the inherent conflicts of interest and information asymmetry in MBOs and controlling shareholder buyouts. In such transactions, the party initiating the acquisition – whether it is incumbent management, the founding family, or a parent company – is an “insider” with greater knowledge of the target company’s intrinsic value and prospects. They may have incentives to minimize the buyout price, to the detriment of outside minority shareholders. The July 2024 revisions to the Code seek to address the conflicts of interest and opacity in MBOs and controlling shareholder buyouts by requiring more rigorous process safeguards and transparency.

III. Scope of Transactions Covered

The following transactions (hereinafter referred to as the “Target Transactions”) fall within the scope of the revised Code, but only if they are expected to result in the delisting of the target company (i.e., going private):

• MBOs: An MBO is defined as “[a] takeover bid from an officer of the target company (including takeover bids where the bidder is conducting the bid based on the request of an officer of the target company and has a common interest with said officer)” (Rule 441 of TSE’s Securities Listing Regulations). In practice, an officer often partners with a private equity fund or sponsor to take the target company private, and such transactions fall under the definition even if the officer is not the direct offeror in the tender offer;
• Buyouts by a Controlling Shareholder or other Related Company, etc.: “Controlling shareholder” refers to a parent company or any person or entity that directly or indirectly holds a majority of the voting rights. It should be noted that the determination of a parent company is based not only on the ownership of a majority of voting rights (shareholding criterion) but also on the control criterion, namely whether the entity in substance controls the financial and business policies of another company. The revised Code also extended the scope to related companies (as defined in the Regulations on Terminology, Forms, and Preparation Methods of Financial Statements), which includes equity affiliates. The term “etc.” encompasses cases that are substantively equivalent to an action by a parent company or other related company—for example, where a subsidiary of the parent company (a sister company of the target) or a parent or subsidiary of another related party acts as the tender offeror; and
• Certain Transactions involving a Controlling Shareholder or other Related Company, etc.: This includes, among others, squeeze-outs of minority shareholders conducted with the intention of retaining a controlling shareholder or other related company, etc. as shareholders of the target company※1.

Furthermore, the revised Code provides that, even in cases that do not fall under any of the above categories, where a controlling shareholder or other related company, etc. engages in a transaction such as making a re-investment in the purchaser after the purchaser has made the target company its wholly owned subsidiary, “it is expected that, depending on the nature of the transaction and the degree of structural conflicts of interest, the parties will consider implementing the procedures set forth in the Code of Corporate Conduct applicable to MBOs and similar transactions, treating them as equivalent to such transactions.”

IV. New Disclosure and Procedural Requirements Under the Revised Code

The following are the major changes introduced under the revised Code:

• Independent Special Committee and Opinion: When making a decision regarding a Target Transaction, the target company’s board must form a special committee of independent members (comprised of outside directors, outside auditors, and/or external experts) and obtain from this committee an opinion stating that the transaction is fair to minority shareholders. This marks a shift from the old standard, which only required a board to obtain an opinion that the transaction was “not disadvantageous to minority shareholders.” This change addresses cases where a special committee deemed a transaction “not disadvantageous” to minority shareholders merely because it offered an exit at a premium to market price, despite concerns over price fairness. To ensure that any increase in corporate value is fairly shared with minority shareholders, the standard was revised to require an opinion that the transaction is “fair to minority shareholders.” However, special committees in most cases appear to have examined transactions from this very perspective even before the revised Code, and, based on such analysis, concluded that they were “not disadvantageous” to minority shareholders. Accordingly, the practical impact of this change is expected to be limited.
• Stricter and “Necessary & Sufficient” Timely Disclosure: The revised Code imposes a heightened timely disclosure obligation once the Target Transaction is approved by the board. Companies are now required to provide “necessary and sufficient” information to investors at the time of the deal announcement. Key disclosures include the full content of the special committee’s opinion (rather than a summary under the old standard)※2 and the key assumptions and financial forecasts underlying the valuation. For example, in addition to describing the specific valuation methodology, if a discounted cash flow (DCF) method is adopted, disclosure is expected to include, among other things, (i) the actual numbers from the financial forecasts used as the basis for the valuation; (ii) the source and identity of the party preparing those forecasts; (iii) basic assumptions of the financial forecasts (e.g., if the financial forecasts differ materially from the ones publicly announced prior to the Target Transaction, the reasons for such deviation), (iv) whether the financial forecasts anticipate a material increase or decrease in free cash flow, the factors underlying such changes; (v) whether the financial forecasts assume the implementation of the Target Transaction; (vi) the specific discount rate applied; and (vii) the method of calculating the terminal value and the numerical parameters used in that calculation.

V. Conclusion

As the revisions have only recently taken effect, the practical expectations for the level of detail—for example, the specific granularity required by the TSE regarding key assumptions and financial forecasts underlying the valuation—are likely to become clearer as more transactions subject to the new rules are announced and market practice develops.