Analysis: Japan's controversial cross-shareholdings get second wind after court battle
10/11/2021 02:22
By Makiko Yamazaki
TOKYO, Nov 10 (Reuters) - A simmering Tokyo legal battle
could embolden Japan Inc to hang on to cross-shareholdings as a
defence against hostile takeovers, a setback for corporate
governance reforms championed under former Prime Minister Shinzo
Abe.
The development threatens to sow uncertainty at a time when
investors are trying to gauge new premier Fumio Kishida's
commitment to pro-market reform and attracting international
investors.
The Tokyo District court last month ruled https://www.reuters.com/article/japan-m-a-idUSKBN2HJ0XN
manufacturer Tokyo Kikai Seisakusho 6335.T could issue a
poison pill, rejecting a request for an injunction from top
shareholder Asia Development Capital (ADC) 9318.T , which
sought to block the move after being excluded from voting on it.
In the absence of ADC, other shareholders approved the
poison pill. Owned by Malaysian businessman Anselm Wong,
Tokyo-listed ADC built up most of its 40% stake in a matter of
weeks, enough to give it veto rights over important board
decisions.
Tokyo Kikai's other shareholders include its business
partners, reflecting the common practice in Japan where
companies take stakes in partners to cement relationships.
"Cross-shareholdings and special shareholders of various
kinds continue to insulate management from having to serve the
interests of general shareholders," said Tokyo-based corporate
lawyer Stephen Givens.
Tokyo Kikai said ADC was excluded https://www.reuters.com/business/sustainable-business/court-battle-raises-question-how-far-will-japan-swallow-poison-pills-2021-10-21
from voting because it was an "interested party", adding
members of company management were also excluded.
But ADC says the fact 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 was arbitrarily applied.
"Interested parties, if broadly interpreted, could also
include shareholders with cross-shareholding or business
interests," said Kazunori Suzuki of Waseda Business School.
On Tuesday, the Tokyo High Court dismissed ADC's latest
appeal. The fund has appealed to the supreme court.
Sompo Japan said it holds Tokyo Kikai shares for strategic
purposes. It said its policy is to contribute to the sustainable
growth of investee companies, and that it exercises its voting
rights appropriately, taking into consideration corporate
governance and compliance.
Mizuho and SMBC declined to comment on individual
shareholdings. Both banks said they vote appropriately at
investee firms. Mizuho said its voting took into account
governance and long-term value.
'COERCIVE' BIDS, OPAQUE HOLDING
To be sure, some economists such as Cambridge University's
Ha Joon Chang say cross-shareholdings - like the presence of
workers on company supervisory boards in Germany - can serve as
a check on the influence of short-term investors who may neglect
investment and over-emphasise dividends and buybacks.
Veteran M&A lawyer Yo Ota, who is advising Tokyo Kikai, said
it was reasonable to exclude ADC to give other shareholders a
say on the acquisition, especially as they were adversely
affected by what he said was the "coercive" nature of ADC's bid
- when an investor feels compelled to sell or risk having their
interests damaged.
Like any other investor, corporate shareholders could be
hurt by the acquisition, Ota said.
ADC said corporate shareholders would not be subject to
coercion because they own stakes for non-investment purposes.
While Japanese firms have been slowly unwinding their
cross-shareholdings in the last two decades, a third of Japan's
$6.6 trillion stock market is still owned by cross-shareholders.
That's down by half since the late 1990s, according to
Nomura Institute of Capital Markets Research.
Under Japan's stewardship code, only institutional investors
are forced to disclose voting records at shareholder meetings.
In a recent survey of nearly 1,600 firms by Japanese
commercial law journal "Shoji Homu", over 60% of the respondents
said such allied shareholders account for 40% or more of their
registers.
Japan's governance code now requires companies to annually
assess whether the purpose of a cross-shareholding is
appropriate.
Companies that have been targets of successful hostile
acquisitions in the past year or two have lacked
cross-shareholders to protect them, said lawyer Givens.
Several bankers said it would be impossible to end the
practice because companies worry about the price impact from a
share sale and the prospect of allied shareholders being
replaced by activists.
"It's 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 Japan's Pension Fund Association.
"The number of shares and amount of shareholder capital that
companies spend on this shows the inefficiency and
unattractiveness of the Japanese market."
($1 = 113.3500 yen)
(Reporting by Makiko Yamazaki; Editing by David Dolan and
Lincoln Feast.)
((Makiko.Yamazaki@thomsonreuters.com; +81-3-4563-2805;))