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Japanese company planning poison pill wins key court victory

Tokyo Kikai set to issue new shares to block acquisition by investment fund

A miniature model of Tokyo Kikai Seisakusho's newspaper rotary press is displayed at the company's headquarters in Tokyo.   © Reuters

TOKYO (Reuters) -- Tokyo Kikai Seisakusho Ltd on Friday won a major court victory in its quest to use a poison pill defence against its biggest shareholder - a closely watched ruling that could make hostile bids in Japan far more difficult.

The Tokyo District Court rejected a request for an interim injunction from Asia Development Capital (ADC), saying the investment firm's purchases of shares in Japan's biggest manufacturer of printing presses for newspapers could be seen as potentially coercive.

It noted that ADC had quickly built up its 40% stake despite warnings from Tokyo Kikai and has not presented the company with a new management plan.

The court also said that actions taken to exclude ADC from a vote by Tokyo Kikai shareholders on whether to adopt the poison pill were "not unreasonable", as the vote was designed to allow other shareholders to judge whether the acquisition would hurt their interests or not.

ADC, a Tokyo-listed firm led by Malaysian businessman Anselm Wong, lambasted the ruling, saying it will immediately appeal to the Tokyo High Court.

The ruling "does harm to the transparency of the Japanese securities market, undermines the capital markets' principle of one share, one vote and damages trust in our legal system," ADC said in a statement.

Tokyo Kikai said in a statement that the poison pill was legal and appropriate.

The battle highlights both a rise in hostile takeovers in Japan over the past few years as well as what experts have called failings in the country's takeover rules, noting they leave small cap firms particularly vulnerable to aggressive stake-building from unwelcome investors.

ADC built up most of its 40% stake in a matter of weeks earlier this year. A holding of more than 33% in Japan gives the stakeholder veto rights over important board decisions and sometimes de facto control.

Tokyo Kikai is seeking to issue new shares to dilute that stake and at an extraordinary general meeting last week where ADC was prevented from voting, Tokyo Kikai shareholders voted in favour of the poison pill.

ADC lawyer Kazumasa Otsuka said the ruling hinges on an unclear legal requirement of "coerciveness" and could be interpreted to mean that all share purchases made legally on the market could be subject to a vote without the buyer if they were seen as potentially coercive.

"This could literally mean that all Japanese listed firms are now equipped with poison pills," he said.

Nicholas Benes, a corporate governance expert and representative director of the Board Director Training Institute of Japan, said the ruling sets "a horrible precedent".

"Regardless of what you may think of ADC, it violates the principle of equality of shareholders under the Companies Act, makes a mockery of shareholder rights and undermines the past six years of governance reforms," he added.

Nearly a decade ago, more than 500 Japanese firms had a permanent poison pill, typically part of their company's articles of incorporation. But the practice - oft criticised for entrenching bad management - fell out of favour after corporate governance reforms.

A poison pill that targets a specific bidder - called an emergency poison pill in Japan - was first successfully employed last year and since then at least five other firms including Tokyo Kikai have either introduced them or sought to introduce them.

Among them, Shinsei Bank plans to seek shareholder approval for a poison pill to thwart online financial conglomerate SBI Holdings' $1.1 billion bid.

By comparison, in Europe tender offers are usually mandatory for acquisitions of stakes beyond a certain threshold - 30% in the UK - a rule that would prevent cases like Tokyo Kikai's.

In the United States, the decision to issue a poison pill can be taken quickly by a company's board whereas Japanese companies feel they need shareholder approval.

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