Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

In July 2015, Toshiba Corporation (“Toshiba”) revealed that it had overstated its profits by billions of dollars. As a result, Toshiba implemented a plan to sell a subsidiary to Canon Inc. (“Canon”). In March 2016, Toshiba sold to Canon its subsidiary Toshiba Medical Systems Corporation (“TMSC”), and Canon paid Toshiba $6.1 billion without making a filing under the HSR Act.

Canon and Toshiba agreed to pay $2.5 million to settle charges for violating the HSR Act.

According to the complaint, Toshiba needed to recognize the proceeds from the sale before the end of its fiscal year on March 31, 2016. However, Toshiba failed to resolve the TMSC sales process as the end of its fiscal year approached. As a result, in early 2016 Toshiba faced a time frame that would make it difficult, if not impossible, to file premerger notifications and receive the necessary premerger clearances in several jurisdictions, including the United States. Eventually, in early March 2016, Toshiba and Canon devised a plan to enable Canon to acquire TMSC, allow Toshiba to recognize the proceeds from the sale by the close of its fiscal year, and avoid filing the notification and observing the waiting period required by the HSR Act.

The complaint alleges that during March 15-17, 2016, in a multi-step process, Toshiba, transferred ownership of TMSC to Canon, but in a way designed to evade HSR notification requirements. First, Toshiba rearranged the corporate ownership structure of TMSC to make the plan possible: it created new classes of voting shares, a single non-voting share with rights custom-made for Canon, and options convertible to ordinary shares. Second, Toshiba sold Canon TMSC’s special non-voting share and the newly-created options in exchange for $6.1 billion, and at the same time transferred the voting shares of TMSC (a $6.1 billion company) to MS Holding Corporation (“MS Holding”) in exchange for a nominal payment of nine hundred dollars. Later, in December 2016, Canon exercised its options and obtained formal control of TMSC’s voting shares. MS Holding was a special corporation formed by Toshiba and Canon to implement the plan.

The complaint further alleges that the transactions masked the true nature of the acquisition. When Toshiba sold its interests in TMSC, while nominal voting-share ownership was divested by Toshiba and passed to MS Holding, true beneficial ownership passed to Canon. MS Holding bore no risk of loss, and no meaningful benefit of gain, for any decrease or increase in TMSC’s value. Rather, it was Canon which bore that risk or would realize any potential gain from TMSC’s operations. MS Holding merely served to temporarily hold TMSC voting securities for Canon’s benefit. Therefore, according to the complaint, Canon became the owner of TMSC in March 2016 when it paid Toshiba the $6.1 billion purchase price for the company. Thus a pre-filing notification was necessary under the HSR Act.

Leave a Reply

Your email address will not be published. Required fields are marked *