Makiko Yamazaki

TOKYO, Reuters – Japan Inc could be encouraged to retain cross-shareholdings in Tokyo to defend against hostile takeovers. This would represent a blow to corporate governance reforms advocated by Shinzo Abe (ex-Prime Minister).

Investors are looking for assurance at a time of uncertainty when the development is threatening to create more uncertainty.

Tokyo District Court ruled last month that manufacturer Tokyo Kikai Seisakusho may issue a poison tablet. It rejected a request from Asia Development Capital, a top shareholder.

ADC was absent so other shareholders supported the poison pill. Anselm Wong from Malaysia, a businessman, owns Tokyo’s ADC. In just weeks it had built up its majority of 40%. This gave the company veto power over key board decisions.

Tokyo Kikai has other shareholders, which include business partners. This is a common Japanese practice where partners are bought out to strengthen relationships.

Stephen Givens, a Tokyo-based corporate lawyer said that “cross-shareholdings” and other special shareholders continue to protect management from the need to represent general shareholders.

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.

ADC argues however that because shareholders tied to Tokyo Kikai are allowed to vote – which includes insurer Sompo Japan (NYSE:) Banking Corp – it is clear that the arbitrarily applied “interested parties” definition.

Kazunori Suzuki, Waseda Business School, stated that “interested parties” could include any shareholders who have cross-shareholdings or business interests.

ADC’s appeal was dismissed by the Tokyo High Court on Tuesday. The appeal was made by the fund to the highest court.

Sompo Japan claimed it owns Tokyo Kikai shares as strategic assets. It stated that its policy was to support the sustainability of growee companies and that it uses its voting rights in a responsible manner, taking into account corporate governance and compliance.

Mizuho, SMBC and SMBC have declined to comment about individual shares. Both banks indicated that they vote as appropriate at investee businesses. Mizuho claimed that it took governance into account and valued long-term investments.

COERCIVE BIDS OPAQUE HOLDING

Cross-shareholdings, according to Ha Joon Chang of Cambridge University, can be a way for short-term investors to avoid investing and under-emphasise buybacks and dividends.

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.

Ota explained that the acquisition could cause corporate shareholders to lose their investment, just as any other investor.

ADC claimed that shareholders of corporations would not be subjected to coercion if they owned stakes for other purposes.

Although Japanese firms are slowly removing cross-shareholdings, one third of Japan’s $6.6 trillion stock exchange is still held by cross-shareholders.

According to Nomura Institute of Capital Markets Research, this is down half a percent since late 1990s.

Only institutional investors in Japan are required to report voting records at shareholder meetings under Japan’s stewardship law.

A survey by Japanese legal journal Shoji Homu of almost 1,600 companies revealed that 60% or more said these allied shareholders make up 40% of their registers.

Japan’s Governance Code now demands that companies annually evaluate whether cross-shareholding is suitable.

Givens, a lawyer, stated that companies who have suffered from hostile acquisitions have not had cross-shareholder protection.

Many bankers stated that it was impossible to stop the practice due to companies’ concerns about the impact of share sales on the market and the possibility that activists could replace allied shareholders.

Ken Hokugo (director of Japan’s Pension Fund Association) stated that “it’s not a common business practice in Western countries, where companies are required to hear the views of shareholders.”

“The inefficiency and attractiveness of Japan’s market can be seen by how many shares companies hold and the amounts of shareholders capital they invest.”

($1 = 113.3500 yen)