Olympus likely to face shareholder legal backlash

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The management of beleaguered Olympus [7733:JP] is expected to face a slew of shareholder legal actions for violating fiduciary responsibilities if allegations of its financial wrongdoing prove to be correct, lawyers told dealReporter.

Shares in the beleaguered Japanese camera maker plummeted last week after the company became ensnared in allegations of financial misdemeanors related to several acquisitions brought by its ousted CEO and other whistleblowers.

Olympus could face a backlash from investors angry, not only at the company’s judgment on the acquisitions it carried out, but also because the amounts involved were so huge, noted one Tokyo-based M&A lawyer.

Letter

In a letter to Olympus President Tsuyoshi Kikukawa obtained by dealReporter, ousted Chief Executive Michael Woodford claimed the camera maker had paid more than USD 3bn for the acquisition of the UK’s Gyrus Group, Altis, Humalabo and New Chief, but carried out the deals without due diligence or seeking professional advice and with no formal board approval.

In the letter, which was based on an independent investigation conducted by PwC, Woodford said the total fee of USD 687m paid to Cayman Islands-based AXAM/AXES equaled 35% of the purchase price of Gyrus, compared with the market practice of 1%.

As for Altis, Humalabo and New Chief, Olympus paid USD 800m in April 2008. Yet the value of its investment was written down by almost USD 600m to only 25% of the value within the same fiscal period, the letter said.

There was also misrepresentation in Gyrus’ financial statements for the year ended March 2009 in relation to the value of the preference share liability on its balance sheet, the letter suggested, hinting at the possibility of false accounting.

“It is truly unbelievable that Olympus made a series of payments to a company in the Cayman Islands, whose ultimate ownership is still unknown to us,” Woodford said in his letter. “The findings of the PwC report are so utterly condemning of those involved, it will be impossible for us to progress without principal changes in the company’s senior management.”

Allegations of financial wrongdoing were also reported extensively by a Japanese magazine in August based on an interview with a whistleblower.

The magazine’s October report said Dynamic Dragons II spc (DDII), a former leading shareholder of Altis which Olympus paid in cash for the acquisition, is actually a subsidiary of the investment fund J Bridge or Asia Alliance Holdings, also currently being investigated for alleged wrongdoing.

What next?

Along with the UK Serious Fraud Office, which Woodford took recourse to this week, Japanese authorities including the Securities and Exchange Surveillance Commission and the Tokyo District Prosecutors’ Office will also investigate these payments, said a second Tokyo-based M&A lawyer.

The Tokyo Stock Exchange may also review whether the dismissal of Woodford was based on proper reasoning, as it did after a similar incident at Fujitsu previously, the lawyer added.

Olympus’ shareholder register contains several large overseas investors, including Southeastern Asset Management with 7.15% and the Government of Singapore, which owns around 2.1%.

“I think the Japanese authorities would be really concerned about tainting the country as a nation of poor corporate governance,” the second lawyer argued. “Japanese and overseas investors could also raise their voices to ask why the self-cleansing mechanism did not work.”

The first lawyer suggested Olympus or a third party would likely set up an independent committee to start a full-scale investigation into the matter, possibly by the end of this month.

He also said that the Tokyo Stock Exchange is expected to move Olympus to its supervisory post by then.

One individual shareholder contacted by dealReporter questioned as to why this hasn’t happened yet and why Olympus has not yet responding to Woodford’s letter in a manner that could be deemed more appropriate.

Ernst & Young, Olympus’ corporate auditor, is expected to present its mid-term review by 15 November, extending the deadline from 8 November as originally planned.

“We are curious as to what Ernst & Young will say,” the first lawyer said. “Whether it would say everything is normal and the acquisition price was appropriate. But the appropriateness is not related to the aggravated breach of trust on the part of management.”

Olympus, meanwhile, said it had nothing to say because the company made appropriate disclosures.

The camera maker said it acquired Gyrus, the London-listed medical device manufacturer, in November 2007 for GBP 935m (JPY 213.2n) in cash or GBP 6.30 per share. The deal was completed in February 2008.

The bid came at an EV/EBITDA multiple of 24.5 on Gyrus’ pre-bid EBITDA of GBP 41.2m (JPY 9.6bn) and net debt of GBP 97m (JPY 22.6bn) for the year ended March 2007.

Olympus reported its pre-bid trailing EBITDA of JPY 158.2bn and net debt of JPY 278.8bn for the year ended 2007. The company reported net debt of JPY 437bn, cash on hand of JPY 267bn and the 12-month rolling EBITDA at JPY 76bn as of 30 Jun 2011.

Olympus shares were trading 4.68% lower at JPY 1324 in Tokyo on Thursday. The share price has plunged 32% since the announcement of Woodford’s dismissal on 14 October.

(Additional reporting by Vivian Wong; data in this article provided by dealReporter research)

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