Consideration paid for a TOB in a Japanese minority squeeze out

December 2, 2010  |  Court

News, information

On 27 October the First Civil Division of the Tokyo High Court issued a decision concerning the basis of calculation of the consideration paid to acquire the shares of minority shareholders (below, the ‘Minority’) post a public offering to take Cybird Holdings, (below ‘Holdings’) private as part of a management buyout transaction.

The Court determined that an appropriate price per share to pay the Minority was, at ・JPY61,360 per share, higher than the original price paid to squeeze out the Minority. However the decision of the Court affirmed the position that the price paid to the Minority in these circumstances should be based on an objective approach to valuation of the company concerned.

Minority Squeeze out

This case concerned a management buyout intended to acquire Holdings, a company quoted on Tokyo’s JASDAQ market, into private ownership through a public offering for its shares.

After the public offering, minority shareholders who did not participate in it were issued with fractional shares in exchange for their existing shareholdings. Those fractional shares were then exchanged or cash for an amount intended to reflect their market value.

The use of fractional shares in this manner is an approach that is commonly used to squeeze out minority shareholders in Japan.

Management incentives

The Minority asserted that, during the period between the date from which discussions about the management buyout commenced until the public offering was actually made, management had no incentive to increase the performance of the company. In fact, it was possible that company may have manipulated the share price in this period.

Accordingly, the minority asserted that the one-year period after which the management buyout was first discussed should be excluded when assessing the value of the business and hence the valuation paid for their shareholding.

In defence, management asserted that, given the financial state of the company and its future prospects were in a state of continual change, in principle reference should be made to the listed price of Holdings during a period as close as possible to the date of acquisition of the company when calculating an objective price for the shares concerned.

The Tokyo High Court determined that, to the extent that there were no special circumstances applicable, an appropriate method to assess an objective value of the shares at the date of acquisition further to the public offering it would be appropriate to use an average market price calculated for a logical period prior to any date when the news of the takeover bid could influence the share price.

Furthermore, the method used in this case, namely taking the volume weighted average closing share price for a period of one month prior to the declaration of the public offer, could not be said to be inappropriate.

Take over premium

However the court noted that the takeover bid premium for the year concerned on average had been 20 per cent. The plaintiff had asserted that the comparable takeover premiums observed in takeover bids were in the range of approximately 22 per cent to 32 per cent. The court determined that a premium of at least 20 per cent above the price calculated according to the method above would be appropriate, and this premium was added by the court to determine the final share price paid to the Minority.


While this is not a tax case, depending on the precise circumstances it may be possible to arrange a minority squeeze out transaction as taxable or non taxable for Japanese tax purposes. Given that a taxable transaction may involve the recognition of taxable goodwill,l such treatment can have significant impact on transaction economics. The detailed taxation of Japanese minority squeeze outs will follow in a later article.

This decision of the Tokyo High Court however is helpful in establishing the principles under which minority shareholdings should be valued in such a transaction, where such valuation may have a significant influence the transaction’s overall tax impact.

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