FDI and Corporate Governance in Japan Michael Ryland Partner 21 July _2 Geread Dooley Lawyer

SLIDE 2 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Topics FDI regulation in Japan Foreign Exchange and Foreign Trade Law FDI case study AREITs in Japan Takeovers law in Japan Takeover Defence Guidelines - Regulatory response Bulldog Sauce case – Supreme Court's stance

SLIDE 3 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 FDI regulation in Japan

SLIDE 4 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 A few FDI facts on Japan US$28.8billion net inbound FDI in 2007 Japanese Government seeking to double inbound FDI to 5% of GDP by 2010 US$50 billion net outbound FDI in 2006

SLIDE 5 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Foreign Exchange and Foreign Trade Law (FEL) 「外国為替及び外国貿易法」（「外為法」） "Gaikoku - Kawase - Oyobi - Gaikoku - Boeki - Ho" ("Gaitame - Ho") Deals with both "Outward Direct Investments" and "Inward Direct Investment" "Inward Direct Investment" covers almost all investment activities of foreign company in Japan

SLIDE 6 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY amendments to FEL 1.Change to approval process: from "Prior Notification" to "Post Facto Report" 2.Change of name: from "Foreign Exchange and Foreign Trade Control Law" to "Foreign Exchange and Foreign Trade Law"

SLIDE 7 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Three types of approval/ notification regulation: Post Facto Report Prior Approval Prior Notification

SLIDE 8 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Example - acquiring shares in a Japanese company Target: Japanese company established in Japan ("Kabushiki Kaisha") Foreign investor: foreign company "Post Facto Report" or "Prior Notification"?

SLIDE 9 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Exemptions to both Prior Notification and Post Facto Report 1.The foreign investor acquires shares from another foreign investor; or 2.The number of shares held by a foreign investor (and certain affiliated entities) as the result of the acquisition is less than 10% of total shares ("Percentage Test")

SLIDE 10 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Questions to be examined: Q1. "Percentage Test": less than 10% → no filing required 10% or more → go to Q2 Q2. "Industry Test" and "Country Test": If a Non-Sensitive Industry and Eligible Country → "Post Facto Report" If A) Sensitive Industry and/ or B) Ineligible Country → "Prior Notification"

SLIDE 11 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Other requirements: "Law Concerning Prohibition of Monopoly and Preservation of Fair Trade" 「独占禁止法」 （ "Dokusen - Kinshi - Ho" ） or 「独禁法」 （ "Dokkin - Ho" ） "Securities and Exchange Law" 「証券取引法」 （ "Shouken - Torihiki - Ho" ） or 「証取法」 （ "Shoutori - Ho" ） Note - "Financial Instruments and Exchange Law" amended the "Securities and Exchange Law" in 2006

SLIDE 12 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 A-REITS in Japan

SLIDE 13 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Investing in Japanese real estate Currently 4 ASX listed property funds with 100% Japanese real estate assets Babcock & Brown Japan Property Trust Challenger Kenedix Japan Trust Galileo Japan Trust Rubicon Japan Trust

SLIDE 14 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Investment model

SLIDE 15 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Investment issues Acquire title to land? Acquire title to trust beneficiary certificate? Investment vehicles: TK, TMK Acquire equity? Board positions? NB residency Management arrangements FIEL licensing implications Borrowing (banks, bank accounts, security) Entering into contracts Making distributions

SLIDE 16 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Takeovers in Japan

SLIDE 17 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 An overview - "Streamlining the Market for Corporate Control: A Takeovers Panel for Japan?" Japanese takeover activity on the rise Catalyst: Takafumi Horie and the Livedoor case Unintended consequences Corporate Japan – "poison pill" defences Japanese government – "Guidelines Regarding Takeover Defences for the Purpose of Protection and Enhancement of Corporate Value and Shareholder's Common Interests" ('Takeover Defence Guidelines') (May 2005)

SLIDE 18 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 An overview - "Streamlining the Market for Corporate Control: A Takeovers Panel for Japan?" "Takeovers Panel" in Australia Primary forum for resolving takeover disputes Aims to bring speed, specialist expertise and commercial pragmatism to the dispute resolution process

SLIDE 19 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 "Japanese corporate environment is ripe for an innovation such as a Takeovers Panel based on the Australian model."

SLIDE 20 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Japanese takeover activity on the rise

SLIDE 21 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Takeover Defence Guidelines: the government’s response (1) Recognises pros and cons of M&A Endorses US-style defensive measures to avoid market damaging M&A activity Implicit approval of Delaware takeover jurisprudence, home of the poison pill defence

SLIDE 22 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Takeover Defence Guidelines: the Government’s Response (2) Three main principles: 1.Enhance ‘corporate value’ and common interests of all shareholders 2.Disclosure to shareholders 3.Conform to Japanese law

SLIDE 23 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Reliance on missing infrastructure? (1) No guidance on timing of poison pills Who monitors corporate management? The Policemen: Shareholders Independent directors Courts

SLIDE 24 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Reliance on missing infrastructure? (2) Shareholders New presence - foreign share ownership from 6.3% in 1993 to 23.7% in 2005 Shareholder activism on the rise But… Financial institutions and business corporations still hold 54.8% of all shares on the TSE Since Japanese companies had sought approval for defensive measures at shareholders meetings

SLIDE 25 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Reliance on missing infrastructure? (3) Independent Directors Still in its infancy – 2002 Commercial Code Limited impact?... Definition of 'independent' director Optional - between 2002 and 2004 only 3% of eligible firms, adopted the amendment

SLIDE 26 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Reliance on missing infrastructure? (4) Courts Will need to build a body of law from the ground up Bulldog Sauce case….

SLIDE 27 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Steel Partners v. Bulldog Sauce Co. Ltd (Bulldog Sauce Case) State of play before Bulldog Sauce case – very limited number of cases had considered defensive measures in takeover bids Rationale of the main decisions - management’s authority to manage the company comes from the shareholders through their appointment

SLIDE 28 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Bulldog Sauce Case - Facts 18 May Steel launches takeover bid on – offered 1,584 yen/ share to acquire100 per cent of Bulldog's shares. Bulldog and Steel exchange questions and comments in writing. Bulldog implement's a defensive measure – allocated stock acquisition rights with discriminatory terms against Steel. Bulldog also seeks endorsement by shareholders at AGM on 24 June % of total shareholders approve.

SLIDE 29 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Bulldog Sauce Case - Facts Steel sought preliminary injunctive relief Three Japanese courts reviewed and decided the case from the viewpoints of whether such allocation: (i) conflicts with the principle of equal treatment of shareholders (kabunushi byodo no gensoku); and (ii) constitutes a materially unfair issuance (ichijirushiku fukosei na hakko).

SLIDE 30 FDI AND CORPORATE GOVERNANCE IN JAPAN 21 JULY 2008 Supreme Court Decision All three courts allowed the takeover defence - but on quite different grounds. Supreme Court paid high regard to the resolution of the shareholders’ meeting in determining the necessity of the defensive measure.