Stock Repurchase as a Defense against Hostile Takeovers

Abstract

The board of directors has the authority to decide on the sale of the companys own stocks, and the board of directors decision to duly dispose of the companys own stocks that have been legitimately acquired should, in principle, be deemed lawful. Even when the company sells its own shares for the defense of the management right, the legality of such sale should be determined considering the reasonable basis and proportionality of the defensive action. If the decision to sell the companys own shares to its shareholders or to third parties is subject to the business judgment of the board of directors, the legality of such sale should be determined in accordance with the same principle. The board of directors decision to sell the company shares should thus be determined in accordance with the principle of reasonable basis and the principle of proportionality. However, if the purpose of the sale of the company shares is only for the benefit of the controlling shareholder having the management right, rather than for the benefit of the company and the shareholders as a whole, then it may be possible for such sale to be deemed illegal. The sale of the companys own shares per se should not be considered an automatic violation of the principle of shareholder equality. Nevertheless, if the companys own shares are sold to certain major shareholders at a price that this significantly lower than the market price, such sale may be in violation of the principle of shareholder equality or the directors duty of care as the fiduciary of the shareholders.