Activist shareholders agitating for better governance from corporate Japan looked to have met their Waterloo last week.
Virtually every proposal made by foreign funds, whether seeking higher dividends, management changes or opposing a merger, was voted down by shareholders – in many cases by an overwhelming majority.
Meanwhile, management proposals to adopt poison pills were largely approved by shareholders.
To make matters worse, the Tokyo District Court approved a poison-pill defence plan proposed by the management of Bull-Dog, the popular sauce maker that is intent on fending off a buy-out offer from Steel Partners of the US, which many lawyers believe is highly discriminatory.
These events send a strong message that shareholders seeking to shake up management and improve the value of the companies they invest in face extremely high hurdles in Japan.
“This is very negative if Japan is seen to be a market which is behaving in an incomprehensible manner,” says Kengo Nishiyama, strategist at Nomura Securities.
In particular, the court’s approval of Bull-Dog’s poison pill highlights the pro-management stance prevalent in Japan.
Bull-Dog will issue warrants that all shareholders can convert into shares. Steel Partners, however, will only be able to exchange its warrants into cash. “The principle that shareholders have equal rights has been challenged,” says Peter Tasker at Arcus Research.
“If this [decision] is upheld [by the High Court] it certainly means that you could put in very, very aggressive rights plans that would not be allowed in the US,” adds Scott Jones, partner at Jones Day in Tokyo.
Meanwhile, judging from the outcome of last week’s AGMs, it seems Japanese shareholders do not want higher dividends and are largely in favour of poison pills. Even shareholders of J-Power, which is more than 40 per cent owned by overseas investors, voted against a proposal by The Children’s Investment Fund that the electricity wholesaler more than triple its year-end dividend.
Mr Tasker suggests that shareholders in Japan may not be voting for higher dividends because “a lot of shareholders . . . obtain some kind of non-financial benefits from the company”.
Individual shareholders, for their part, are likely to have been hesitant due to the high dividend increases many of the foreign activist funds were seeking, says Mr Nishiyama.
According to a monthly survey by Nomura, individual investors also believe companies should have some protection against abusive corporate raiders – hence the widespread support for poison pills.
In spite of these latest setbacks for activist shareholders, many people believe that change is taking place, albeit at a slow pace.
While the large number of votes cast in support of management may be disappointing for those seeking change, Mr Nishiyama says: “I think it is revolutionary that the shareholders’ proposals won as many votes as they did.”
The 30 per cent of J-Power shareholders who voted with TCI, he adds, “shows that there are many shareholders willing to side with the activists”.
Shareholders are also increasingly willing to vote against management since a number opposed management proposals for the first time two years ago. Although the overall numbers are small, the trend has continued.
This year, for example, shareholders opposed a plan by Fuji Film to increase the number of shares it will be able to issue, thereby curtailing management’s ability to dilute any unwanted take-over bid.
Mr Nishiyama is also confident that, despite the court’s ruling in favour of Bull-Dog’s poison pill, it will be difficult for many companies to follow suit. This, he says, is because Bull-Dog’s defence measure was approved by shareholders with a two-thirds majority, and winning such a high majority is not easy.
For their part, activist funds have not suffered financial losses. “They are economically still in a pretty sound position,” says Mr Tasker. “The story is not over.”