Tokyo High Court Clears Way for UFJ, MTFG Merger
Reviewed by Hitoshi URABE
"Tokyo High Court Clears Way for UFJ, MTFG Merger"
At the outset, a correction is needed in the article introduced. In fact, a majority of reports on this subject in English (and presumably, other languages) have been written under similar misunderstanding, effectively displayed in the line from the article saying, "Sumitomo Trust is a unit of the Sumitomo Mitsui Financial Group ..." - which is not so.
Although it carries the name Sumitomo, The Sumitomo Trust & Banking Co. (STBC) is not a member of the Sumitomo Mitsui Financial Group (SMFG). This is admittedly confusing, especially not only the name but the fact that SMFG does not have a major trust operation within its group would make anyone suspect that STBC is a member of SMFG. While this may be a trivia in an ordinary case, currently this is one of the key elements adding complexity to the whole issue.
To sort out the events:
- In early May, UFJ announced that it would be reporting a sizable operating loss for the fiscal year ended in March. (Some say it was forced to do so by the Financial Services Authority, - which is another story.)
- On May 21, a rumor which had been around for a while was confirmed by UFJ that it would sell its Trust Banking Subsidiary, UFJ Trust, to STBC (which is, again, unrelated with SMFG in terms of accounting and otherwise) in order for UFJ to prop-up its capital base.
- Then on July 16, UFJ announced that the whole of UFJ, including the trust operation, would merge with - a polite expression for "being sold to" - The Mitsubishi Tokyo Financial Group (MTFG), the healthiest but second in size among Japanese banks.
- Utterly surprised by the announcement, STBC asked the Tokyo District Court to order a temporary injunction to suspend the merger talks of the trust operation of UFJ with MTFG. At the same time, STBC approached SMFG and hinted if SMFG would look into acquiring the rest - the commercial banking sector - of UFJ. SMFG, itself seeking a chance to solidify its business base, viewed the possibility of working closer with STBC in the future to enhance its trust business if the mergers by STBC and SMFG of parts of UFJ succeeds, and quickly formulated a merger proposition, to which UFJ did not show any interest.
- The District Court provided the temporary injunction on July 27, and UFJ immediately appealed to the Tokyo High Court to turn the decision around.
- On August 11, the High Court overturned the decision of the District Court, and lifted the injunction to allow for resumption of merger talks between UFJ and MTFG.
Following the decision by the High Court, UFJ and MTFG immediately concluded and announced the basic agreement for MTFG to inject 700 billion yen in aid to UFJ - an initial step for the merger. STBC, during the while, submitted a special interlocutory appeal to the Supreme Court.
Most of the business people have welcomed the High Court's decision, as the merger of MTFG and UFJ would have an effect of strengthening Japan's financial sector as a whole, bringing it further closer to end the financial doldrums lasting for more than a decade. However, many in the legal profession have issued comments questioning the High Court's decision, especially where the court reasoned that the action by STBC in asking the court for injunction had indicated the loss of faith between STBC and UFJ, and that whatever should be protected by the injunction is already lost. Some practitioners have questioned this reasoning as it being arguing in a circle,
The tactic adopted by MTFG and UFJ is apparently to build up enough facts quickly where it would become unrealistic to reverse the negotiation, even if it may cost them a significant amount of compensation to STBC.