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BOOK SERIES | Minority Shareholders, Chapter 5: A Stalking Horse

Minority Shareholders, Chapter 5 of Shin Ushijima's novel takes the reader into the drama of buying, selling and dying with shares in a family-owned company.



In this chapter of Minority Shareholders, I continue the story of Norio Takano. He is not a specific person; he is a character created for my book out of some high rollers who had existed during the bubble period.

As a young lawyer, I witnessed the generation of enormous wealth from scratch. A minority shareholder of a family company brought an action to the court and succeeded in taking hundreds and thousands of yen. I saw it firsthand. Ten years after the bubble popped, I started work related to corporate governance. In this book my fictional characters tell the story of problems that persist in joint-stock corporations. What is an organization called a company? What if Norio Takano were reborn in this era?

This story is a work of fiction. Any resemblance to actual characters or organizations is entirely coincidental and unintentional. ー Shin Ushijima

Read earlier chapters of the series.

Minority Shareholders
Book cover, "Minority Shareholders" by Shin Ushijima.

Chapter 5: A Stalking Horse

Continuing from Chapter 4: Norio Takano has just explained why his mother wants to buy shares of a small company from her friend. After hearing all the cautions, Lawyer Ooki says, "OK then, buy them. You'll have to go through a lot of procedures, possibly all to no avail. Brace yourself for it. As I just explained, the company won't approve it. So it would be better for you to appear as a sort of 'stalking horse.'"

"[...] circumstances may conspire to enable Auntie Sumida to sell her shares to somebody related to the company. So if you play the role of a stalking horse, you can mask your true plans and help her out in the end."

Showing signs of impatience, Takano slid aside the white Wedgewood tea cup in a rough manner. Ooki carried on speaking in a detached tone. 

"Look, the company is not obligated to purchase the shares even when requested to by its shareholder. But if the shareholder wants to sell them to just anybody, and if the company does not approve of this 'just anybody,' the shareholder can demand that the company designate someone else. And the company is inevitably compelled to buy the shares of the shareholder.


Finding a Designated Buyer

"To be exact, it is the company itself or a third party designated by the company as a purchaser that is eventually obligated to buy the shares."

"Wow, sounds so complicated!"

"Yeah, so you shouldn't play down the ramifications that shares can create. If there is one shareholder standing against the owner president of the company, it may cause considerable confusion to the management. And that is not the end of the story, only the beginning. In the next stage, the company has to haggle over the price of the shares with such a third party, which will take a lot of time and trouble."

"What a cumbersome procedure!"

"Yeah, but it's quite natural. The seller expects a high price, and the purchaser wants to get them as cheap as possible. The same is true for any other business transaction."

Pricing Stocks on Lukewarm Tea

Ooki looked out of the window again and sipped the lukewarm tea with relish. 

Ooki's office is on the 45th floor of the building, far below which the prime minister's office can be seen. When an earthquake hits, it sways. But the landlord said that the building is the most well-built among all buildings in Japan. 

Thirteen years have passed since he moved into the building. The prime minister's office was already there, but he cannot place who the prime minister was at the time. Was it Mr Junichiro Koizumi? Anyway, the current resident is Mr Shinzo Abe, the seventh prime minister from Koizumi. 


Takano tried to listen carefully to Ooki's explanation, but he was not sure that he was following.

Ooki continued, "Shares of listed companies are priced on the market. The market price fluctuates from day to day and goes up and down even within a day. A certain price is offered to someone who wants to sell or buy shares. That is the so-called stock market. 

"Everyone wants to sell their shares even a yen higher and buy them even a yen lower. That's human nature. But you can see a totally different picture in the case of unlisted companies. Their shares are not priced because there is no market for them. 

"We don't know how much they are worth, unlike listed shares, but when they are traded they should be priced. If you don't determine a price, you cannot trade them. When shares in a family company are to be traded on the market, that's when the company itself is put on sale. It requires an amount of shares that are enough to control the company with a so-called majority stake."

Taxpayer Troubles on Transfers of Minority Shares

After saying that, Ooki caught his breath. Takano was looking at Ooki with serious eyes. Takano was such an innocent man. They knew each other only too well.

"But trouble may arise when a family company deals with a transfer of minority shares. When trading their shares, minority shareholders defer to the company because only the company or the owner president can purchase their shares. If the company itself is traded on the market, the seller and the purchaser can cut a deal through face-to-face talks. 

"If it's a transaction among disinterested third parties, the tax office may ignore it. But a minority shareholder may face trouble when selling their shares. The price of the shares will be determined based on the previous trading. No negotiation. And even so, that's only after the owner president has resolved to buy them. 

"Except for the owner president, no one else thinks a minority stake in an unlisted company is valuable. Remember, unless you own a majority stake, you mean nothing to the company. You cannot sell your shares on your own terms because your shares don't reflect the true value of the company. 


"Alternatively, if the company is listed, you can calculate how much you can get. It's easily done. But in the case of an unlisted company, it's only a majority stake that really counts. Of course, if you have a certain amount of shares and if you gain more, you may become a majority shareholder. Or you can buy shares from other shareholders to obtain a majority stake, preferably 100%." 

Finding the Value in Unlisted Shares

"As you know, it often happens that a large corporation sells its unlisted subsidiary. This is often achieved by selling its shares. So the value of the shares is the price of the company. The assets it has and the profits it earns are counted for valuation. 

"The nitty-gritty is, in such a case you should purchase enough shares to take control of the company. If you have a majority stake, you can choose directors at the general shareholders' meeting, which means you definitely have control. Usually some family holds the majority stake. But if the shares have been dispersed, people concerned are likely to battle over the controlling interest, which may eventually lead the company to its fragmentation. So in an effort to prevent this, either side will dish out big bucks to buy the shares of the other side. 

"You know, it's cooperation by a kinship family. As I said before, a kinship family includes a spouse, a person within the sixth degree of kinship and a person within the third degree of matrimonial relationship. It's so extended. Even though they may not know each other well, the tax office categorizes all of them as a kinship family. Thus a problem arises and a tragedy occurs."

Then It Gets Personal

"Oh," Takano opened his mouth and said, "But you can forfeit your inheritance before a tragedy occurs. You are at liberty to claim or relinquish your fortune, right?"

Ooki replied in irritation, "If you are a beneficiary of a part of a fortune bequeathed, you are either to inherit it all or to abnegate it all. You can't say that you'll take the house but give up the shares."

"I see, but hang on. Isn't there a system called 'limited recognition' or something like that for saving those who have to incur a debt when they inherit a legacy?"

"Yes, there is. You know it well. Limited recognition is the system where a beneficiary can receive the remainder after the debt has been taken away."


"So, you mean it's not practical. If the tax office judges that the shares someone has are of exorbitant value, they will go bust with an excessive amount of taxes. It's not someone else's affair to me. I'll have to let go of my house, which is under the name of my company. My mother, my wife, my two children and I have lived there for years. How pathetic! 

"My children are my mother's grandchildren. They are children by my current second wife, and they are still students. It's the house where they were born and brought up. How awful it would be to lose it just because they inherit some shares."

Everything's at Risk 

"Your house in Himonya, right? What a shame should that happen. I have fond memories of it. But the tax office may say that you have inherited property of such a value. Anyway you have money to burn, so it's no problem for you to pay any amount of tax when you inherit your mother's property, right?"

Ooki often encountered such cases when practicing law. He touched on that in a modest way.

But Takano tried to refute it. "Regardless of how much I have, I don't want to pay a penny for anything irrational. Anyhow, you haven't made it sound like it's a shame. I understand since you are a lawyer. Just like a doctor cannot do a proper job if they shed tears for every patient that passes away. Nevertheless, it's unbearable. 

"I have done nothing wrong, but I may face the risk of losing everything when my mother's gone. I can't stand the idea of being evicted from my house. I don't care what the tax office says; it's their duty to collect taxes, and I'm not complaining about it. But the Supreme Court is disappointing. Should it not protect citizens from undue exertions of power? Yet, it has supported the position of the tax office. Unbelievable! Is Japan really a civilized nation? What do you say?"

Takano sounded a bit beside himself. 

Continues in: Minority Shareholders, Chapter 6: The Good Son



Minority Shareholders is a work of fiction and any similarity to real characters, companies and cases is purely coincidental and unintentional. Sign up to join our mailing list and look for the next chapter every Saturday on JAPAN Forward.

Author: Shin Ushijima
The founding partner of Ushijima & Partners, lawyer Shin Ushijima has an enormous wealth of experience in international transactions, merger and acquisition, dispute resolution, system development, anti-monopoly law, labor, and tax law. Concurrently, he heads an NPO called the "Japan Corporate Governance Network." And in his leisure moments, he writes fiction. Additional details on Shin Ushijima's career, awards, publications and more are available at his website: Ushijima & Partners, Attorneys-at-Law.