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Softbank, the Japanese communications group, is being dragged into a row over related-party transactions by its affiliates with a Korean gaming company controlled by a vehicle linked to the brother of Softbank founder Masayoshi Son.
The internet and telecoms group, one of Japan’s most traded stocks, has previously courted controversy over its accounting practices, worries about which knocked 15 per cent off the share price in the space of two days in August.
The latest battle pits minority shareholders in Gravity, a Nasdaq-listed company based in South Korea, against its current management and Softbank affiliates who do business with Gravity. The minorities are launching a proxy battle claiming Gravity has been run for the benefit of a vehicle linked to Taizo Son, the Softbank founder’s brother, which holds 52.4 per cent of Gravity’s shares.
They allege that a slew of related-party transactions have bled value from Gravity and want to oust two directors for approving what they call “questionable actions”.
According to a proxy due to be filed within days and seen by the FT, minorities want three remaining independent directors to “install competent management ... to insure that the company is run for the benefit of all the shareholders, rather than solely for the benefit of the majority shareholder ... and its related parties: Taizo Son, GungHo [a Softbank affiliate], and Softbank”.
“We will not sit by and let these guys destroy shareholder value,” said Dan Gagnier, a spokesman for the Gravity Committee for Shareholders which represents investors owning 17.6 per cent of Gravity’s shares. “If they want to do related-party transactions and dealings with Softbank, they should take Gravity private [taking out minorities] at a fair price.”
Softbank, GungHo Online Entertainment and Taizo Son declined to comment. Gravity said confidentiality clauses precluded disclosing the terms of business agreements, but it believed it had responded to minorities “with integrity”. It blamed the poor performance of its shares on a lack of investor relations activities.
GungHo is 44.6 per cent held by Softbank. More than 80 per cent of its revenues come from a licence for an online game called Ragnarok owned by Gravity, which will not say how much GungHo pays for the licence.
The minorities’ priority is to oust two members of the board who approved the actions that, according to the irate shareholders, have destroyed value at the company. Gravity’s shares are now languishing below $6, or around half the $13.50 at which they were listed in February 2005.
Current concerns revolve around a clutch of related-party transactions which, the minorities allege, have benefited affiliates of Softbank at the expense of smaller shareholders.
Like many Asian companies, Gravity – and Softbank – operate within a network of linked companies. Softbank’s links with Gravity began in August last year when EZER, a vehicle affiliated with Taizo Son, brother of Softbank founder Masayoshi Son, acquired 52.4 per cent of the game maker.
Masayoshi Son helped fund the purchase, which took place at a huge premium to the share price, using some of his own Softbank shares as collateral.
According to the proxy, this deal set the tone for future related-party transactions. “EZER surprisingly admitted ... that the primary purpose of the acquisition of the majority interest was ‘to secure for the benefit of GungHo a continuing licence for Ragnarok. EZER’s admission makes it clear that GungHo’s two principal shareholders, Softbank and Taizo Son’s Asian Groove, stood to benefit directly from the EZER control purchase”.
GungHo Online Entertainment, which is 44.6 per cent held by Softbank, derives more than 80 per cent of its revenues from a licence for Ragnarok.
The EZER deal is one of several investors feel requires greater scrutiny. “The muted nature of the disclosure regarding the licence renewal strongly suggests to the Committee that the interests of the minority shareholders were ignored,” the proxy adds.
“We believe [Gravity directors Il Young Ryu and Seung Taek Baek] saved GungHo, for the benefit of Taizo Son and Softbank, by allowing EZER and its related entities to follow through with their plan to force Gravity into the licence renewal with GungHo.”
Gravity says it carried out an auction and made its selection based on price and relevant expertise. It says: “We concluded that GungHo Online Entertainment was one of the leading companies in the Japanese market.”