Letter from... Japan

Shareholders’ meetings used to be such simple affairs in Japan. They were quick, efficient and rarely was a hand in the crowd raised. But those previously compliant and conservative shareholders are now asking tough questions.

‘Back in the 1980s, companies had their own banks and all the funding they needed, so they didn’t need to use the stock market to raise capital,’ said Robert Grondine, a partner with White & Case law offices. And with high taxes on dividends, it made sense for investors to plough their money back into the company. It did little to encourage disclosure, however, and management could effectively ignore shareholders because the banks were in control.

Only in the last seven years has Japan seen a significant move from bank deposits to shares. But now the genie is out of the bottle, it is not going back.

The initial agitation was by individuals such as Takafumi Horie, the then head of internet outfit Livedoor Co, and Yoshiaki Murakami, presently on trial for insider trading over the purchase of Nippon Broadcasting System Inc shares in September 2004. Horie attempted a hostile takeover of Fuji Television Network Inc and was found guilty in March of fraud. Another aggressive player has been Steel Partners Japan Strategic Fund (Offshore) LP, a fund management subsidiary of Cayman Islands-registered Steel Partners.

Traditional Japanese corporations had seen nothing like these voracious acquisitors before. While Horie apparently saw himself as a media mogul and Murakami declared he was simply acting in the interests of shareholders – as well as those with a stake in his Murakami Fund – Steel Partners is snapping up sizeable amounts of many household names here. One of the most recent has been Tenryu Saw Manufacturing Co, while it has also taken aim at Sapporo Holdings.

‘Some companies are responding to the threat and Japanese managers are now having to learn very fast,’ said Nicholas Benes, President of JTP Corp. ‘There are still some who resent the notion that shareholders have an opinion and that they have to listen to it, but most have gradually realised that they do have to listen.’

The internet and the shift from banking savings has brought vast numbers of individuals into the shareholding game, rubbing shoulders with foreign investors, mutual fund and pension fund managers. And while some have given the trend a bad name by exploiting loopholes in Japan’s legislation, the desire to acquire is not the sole motivation.

Scott Callon had no inkling that what looked like a straightforward opportunity to buy into an undervalued steel company in Tochigi Prefecture would make headlines for Ichigo Asset Management as Japan’s first successful shareholders revolt.

‘No shareholder had ever blocked a transaction in Japanese corporate history before, and we are a small and new company, but we felt we had no choice but to act,’ said Callon.

One year old, Ichigo has a portfolio of small Japanese companies, including a 21.4% stake in Tokyo Kohtetsu. Osaka Steel offered shareholders a premium of 0.3% to the average share price prior to the announcement of the proposed incorporation deal.

But with the stock trading at 6.2 times earnings and a 26.9% return on assets over three times the average of Japanese companies, Callon says it was clear Osaka Steel would be making a great acquisition very cheaply, but that Tokyo Kohtetsu’s stockholders would be losing out. He emphasises he did not oppose the deal, only that the shareholders should be fairly compensated.

Left with little alternative, Ichigo contacted fellow shareholders and staged a proxy fight. In February, 55.9% voted for the merger, short of the two-thirds majority. Of the 42% who opposed it, the majority said their decision was based on the poor returns they would have received.

‘This would have been a great transaction and we supported it because of the significant synergies that existed,’ said Callon. ‘And while it was a strong transaction, they needed to be fair and not force the shareholders to accept it.’ Tokyo Kohtetsu’s share price is now 30% above what it would have been had the transaction proceeded.

‘Japan’s 40 million shareholders should not be disenfranchised, and we were strongly of the opinion that we should do all we can to support and protect Tokyo Kohtetsu shareholders,’ said Callon.

JTP Corp’s Benes says Ichigo has made a significant breakthrough in the utilisation of proxy voting, but that many more areas remain to be tested. And the organisations that are likely to be doing the testing are in the hostile spectrum.

‘Companies like Steel Partners or Dalton Investments say they’re going to carry out takeover bids and, although they may not have been successful yet, it does worry managements,’ he said. ‘We can love it or hate it, but this is a market and it’s going to happen. In Japan, there are a lot of undervalued companies – and that means a lot of opportunities in the short term for mergers and acquisitions.’

Julian Ryall is a freelance journalist who has lived in Japan for 14 years, covering business, politics and social issues.