Makiko Yamazaki

TOKYO (Reuters) – Japan’s Toshiba Corp (OTC) is entering Thursday’s crucial shareholder vote regarding its plan for spin-off of its devices business.

Its three largest shareholders – Effissimo Capital Management, 3D Investment Partners and Farallon Capital Management – all activists shareholders with whom Toshiba management has had a troubled history – opposed the plan. Proxy advisory firms Institutional Shareholder Services ISS and Glass Lewis also oppose it.

Another proposal, from Singapore-based 3D, is on the table, requiring management to request buyout offer from private equity. It has the support of Effissimo Farallon and Glass Lewis. But, possibly more importantly, it does not ISS.

For each proposal to be approved, 50% must vote.

Whatever the outcome of Thursday’s vote, it is yet another battle in an ongoing scandal-filled conflict between activist shareholders (146-year old conglomerate) and company officials.

According to Toshiba Management, a spinoff would be the best option for maximising shareholder value. The plan, according to source familiar with it, would increase Toshiba’s share price so that activist shareholders wouldn’t be discouraged from leaving.

Toshiba rejected requests to buy out private equity investors. It claimed that the offers made so far weren’t compelling enough and could cause concerns over its business and employee retention.

Toshiba plans were met with widespread opposition. At the moment, however, activists shareholders have considerable momentum.

Effissimo and 3D together own about 25% of Toshiba. The total amount of foreign investor funds holding 30% is estimated, while overseas investors hold 50%.

Notable institutional investors that have publicly voted against spin-offs include Norway’s sovereign wealth, which has 1.22% and California’s Public Employees Retirement System, with 0.43%, as well as the State Board of Administration of Florida, with a stake of 0.22%.

BlackRock (NYSE), which holds more than 5 percent, Elliott Management, which is estimated to have nearly 5%, Vanguard, which has 2.6% Refinitiv data, are some of the large investors who still have not revealed their votes.

No major Japanese asset manager has revealed its voting intentions.

Unevident SUPPORT FOR A 3D PROPOSAL

The spin-off proposal may fail, but hedge fund investors could emerge empowered and gain momentum for their bid to buyout. Sources familiar with the situation told Reuters that even if management prevails, shareholders will continue to fight, despite this, on condition of anonymity.

Toshiba indicated that they will make every effort possible to get shareholder support for the plan’s dissolution.

Fumio Mumoto, Okada Securities chief strategist said that “large shareholders” will not stay unless shares prices go up.

A private equity solution may be the best option for shareholders looking to exit quickly with strong returns but it might not be ideal for Toshiba, he said.

However, support for 3D is less evident than opposition to Toshiba spin-off plans.

CalPERS voted no in the matter, despite ISS’s warning.

Norway’s sovereign fund voted against, as did Raymond Zage from Toshiba External Director. Zage is Farallon advice and claims to be a Top 100 shareholder. He has also voted in favor of Toshiba.

Toshiba’s management is under severe pressure by activist funds. In 2017, Toshiba sold 600 billion Japanese yen (about $5 billion) stock to many foreign hedge fund dozens during the financial crisis that erupted from its U.S. nuclear plant bankruptcy.

In the last two years, there have been several high points of animosity between the sides. Last June a shareholder-commissioned probe found Toshiba colluded with Japan’s trade ministry – which sees the conglomerate as a strategic asset due to its nuclear reactor and defence technology – to block overseas investors from gaining influence at its 2020 shareholder meeting.

($1 = 120.4000 yen)