Appraisal or Injunction? Corporate Takeovers Under Uncertain Judicial Valuation

Since the enactment of the Companies Act of 2005, the Japanese legal system has relied heavily on the appraisal remedy to relieve shareholders who believe consideration for a corporate acquisition is inadequate. Building upon this short-lived tradition, Hōsei Shingikai Kaishahōsei Bukai, the legislative body governing the enactment of corporate statutes in Japan, has recently proposed partially expanding the scope of injunctive relief to long-form mergers and certain other types of corporate transactions. In this paper, I discuss, through a simple model analysis, whether the Japanese legislature should allow for injunctions against corporate takeovers. In this analysis, the effect of uncertainty in judicial valuation on corporate takeover activities is evaluated under both the appraisal system and the injunction system. My analysis reveals that the appraisal system has the benefit that once courts successfully establish public expectation that generally courts do not overvalue target shares, the possibility of a court’s overvaluing a target’s shares in an individual case will not frustrate individual corporate takeover attempts. In contrast to this, the injunction system has the benefit that even if courts make unwise decisions which create an expectation amongst the public that courts tend to overvalue target company shares, such expectation does not have a general deterrent effect on corporate takeovers.