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Canon, Toshiba Chided by Regulators Over $6.5 Billion Deal

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06/30/2016 | 02:25pm CEST

TOKYO?Japanese regulators warned Canon Inc. that the way it acquired Toshiba Corp.'s medical-systems unit potentially violated the law, but said the deal can go ahead.

The rules are ambiguous, regulators said Thursday, but they added that any future transaction such as the one between Canon and Toshiba could be subject to a criminal complaint.

Fujifilm Holdings Corp., the loser in bidding for the unit, expressed displeasure at the decision.

At issue is the structure of the deal, reached in March and valued at ¥ 665.5 billion ($6.5 billion). Canon paid the purchase price up front?Toshiba, having incurred sizable losses after an accounting scandal, needed cash ahead of the March 31 end of its fiscal year?but didn't immediately receive shares in the medical unit.

Instead Canon got warrants entitling it to the shares once the deal received regulatory approval. Until then, the shares would be parked in a special-purpose company with just ¥ 30,000 ($292) in capital.

Japanese law says that a company planning an acquisition that raises antitrust issues must report its plans to the Fair Trade Commission before an agreement. The commission said Thursday that the Canon-Toshiba arrangement could be viewed as skirting the law by effectively doing the transaction first and telling regulators later.

Takeshi Shinagawa, director of the commission's mergers-and-acquisitions division, said it was the first time this technique had been used in Japan, and there is no clear rule against it.

"We decided to make an announcement about the warning to let everyone know that it is not acceptable, so the same method won't be used in the future," Mr. Shinagawa said. He added that companies have asked the FTC whether it passes muster.

Canon said it took the warning seriously. "We will firmly follow the law while improving transparency of our business," the company said in a written statement.

Toshiba, which also received a warning, said it didn't think there was anything illegal about the deal, but added that it would continue to work on improving compliance.

The medical-equipment business was one of Toshiba's few steady profit makers. The business makes and supplies equipment such as X-ray machines, computed tomography scanners and magnetic-resonance-imaging systems.

The unit's sale drew wide interest, including from U.S. private-equity firms. Ultimately, the bidding came down to Canon, which is seeking growth drivers as its camera business deteriorates, and Fujifilm, which has been expanding its medical business.

That made it a battle between two of Japan's most prominent executives: 80-year-old Fujio Mitarai, who has led Canon for two decades, and Shigetaka Komori, 76, who is credited with keeping Fujifilm prospering even after its film business withered.

Fujifilm responded bitterly after it lost, calling the deal's structure "extremely tricky" and saying Canon treated the FTC with a lack of respect that "would be unthinkable for a company such as ours that has a policy of acting openly, fairly and clearly."

Fujifilm said Thursday it isn't satisfied with the FTC's decision to let the deal stand: "We demand an explanation for why the scheme was allowed this time when it is not going to be accepted in the future. It was an unfair fight for us."

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

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