Analysis: Japan’s controversial cross-shareholdings get a second wind after court battle


The logo of Tokyo Kikai Seisakusho Ltd. is displayed at the company headquarters in Tokyo, Japan on October 21, 2021. REUTERS / Issei Kato

TOKYO, Nov. 10 (Reuters) – A latent legal battle in Tokyo could encourage Japan Inc to retain cross-holdings to defend against hostile takeovers, a setback for corporate governance reforms championed under the former prime minister Shinzo Abe.

The development threatens to sow uncertainty as investors try to gauge new Prime Minister Fumio Kishida’s commitment to pro-market reform and attract international investors.

Last month, the Tokyo District Court ruled that maker Tokyo Kikai Seisakusho (6335.T) could issue a poison pill, rejecting an injunction request from main shareholder Asia Development Capital (ADC) (9318.T ), who sought to block the movement after being excluded from the vote.

In the absence of ADC, other shareholders approved the poison pill. Owned by Malaysian businessman Anselm Wong, Tokyo-listed ADC has made up most of its 40% stake in a matter of weeks, enough to give it veto power over important board decisions .

Tokyo Kikai’s other shareholders include its business partners, mirroring common practice in Japan where companies take stakes in partners to cement relationships.

“Cross-shareholdings and special shareholders of all kinds continue to prevent management from serving the interests of general shareholders,” said Stephen Givens, Tokyo-based business lawyer.

Tokyo Kikai said ADC was excluded from the vote because it was an “interested party”, adding that members of the company’s management were also excluded.

But ADC claims that the fact that shareholders with ties to Tokyo Kikai were allowed to vote – including insurer Sompo Japan (8630.T), Mizuho Bank (8411.T) and Sumitomo Mitsui Banking Corp (8316.T ) – shows the “interested party” definition has been arbitrarily applied.

“Interested parties, if interpreted broadly, could also include shareholders with cross-shareholdings or business interests,” said Kazunori Suzuki of Waseda Business School.

On Tuesday, the Tokyo High Court dismissed ADC’s latest appeal. The fund appealed to the Supreme Court.

Sompo Japan has stated that it holds shares of Tokyo Kikai for strategic purposes. He said its policy is to contribute to the sustainable growth of the issuing companies and that it exercises its voting rights appropriately, taking into account corporate governance and compliance.

Mizuho and SMBC declined to comment on individual entries. Both banks said they vote appropriately in issuing companies. Mizuho said his vote took into account governance and long-term value.

‘COERCIVE’ OFFERS, OPAQUE DRESS

Certainly, some economists such as Ha Joon Chang of the University of Cambridge argue that cross-shareholdings – such as the presence of workers on company supervisory boards in Germany – can be used to control the influence of short-term investors who may neglect investment and favor dividends and redemptions.

Veteran M&A lawyer Yo Ota, who advises Tokyo Kikai, said it was reasonable to exclude ADC to give other shareholders a say in the acquisition, especially since they have been negatively affected by what he said was the “coercive” nature of ADC’s offer – when an investor feels pressured to sell or risks having their interests harmed.

Like any other investor, the company’s shareholders could be affected by the acquisition, Ota said.

The ADC said shareholders of companies would not be subject to coercion for holding stakes for non-investment purposes.

While Japanese companies have slowly unwound their cross holdings over the past two decades, a third of Japan’s $ 6.6 trillion stock market is still held by cross shareholders.

That’s down by half since the late 1990s, according to the Nomura Capital Markets Research Institute.

Under Japan’s management code, only institutional investors are required to disclose voting records at shareholder meetings.

In a recent survey of nearly 1,600 companies by the Japanese trade law journal “Shoji Homu”, more than 60% of respondents said these allied shareholders represent 40% or more of their records.

Japan’s corporate governance code now requires companies to assess annually whether the goal of cross-ownership is appropriate.

Companies that have been the target of successful hostile acquisitions over the past two years have not had cross-shareholders to protect them, lawyer Givens said.

Several bankers have said it would be impossible to end the practice as companies worry about the impact on the price of a sale of shares and the prospect of allied shareholders being replaced by activists.

“This is a business practice that you don’t see in developed western countries where the environment forces companies to listen to the opinions of their shareholders,” said Ken Hokugo, director of the Japan Pension Fund Association.

“The number of shares and the amount of share capital that companies devote to it shows the inefficiency and unattractiveness of the Japanese market.”

($ 1 = 113.3500 yen)

Reporting by Makiko Yamazaki; Editing by David Dolan and Lincoln Feast.

Our Standards: Thomson Reuters Trust Principles.


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