Land of the Rising Activists?
What the Future Holds for Activist Shareholders in Japan

(This article will be published in 2 parts: the first part will focus on the current climate of shareholder activism in Japan prior to the landmark case of Alphaleo Holdings and Inui Global Logistics. The second part will focus on the Alphaleo decision and its implications.)

Part 1: Current Climate of Shareholder Activism

1.　Introduction

There are widely held stereotypes and conceptions of how Japanese corporations are run. These include that they are cash rich, institutional investors are passive, and shareholder activism is rare and discouraged. Indeed, this has been a fair representation of corporate governance in Japan since the bubble-era until the introduction of the Corporate Governance and the Stewardship Codes in 2014 and 2015, respectively, in direct response to the global financial crises.

Since then, Japan has seen a proliferation of shareholder proposals made at general meetings. Activist shareholders have made demands on a myriad of matters: transparency, share buybacks, increased dividends, and the removal of directors being just a few. Attitudes towards shareholders are changing, and an awareness is growing of the need to begin a constructive dialogue with shareholders. Accompanying this trend is an increase of stock buybacks in the past 2 years; >a doubling of the total amount of dividends distributed in the market in the past 5 years, as well as a steady increase in the numbers of foreign shareholders in public companies.

Against this backdrop, this article discusses the changing landscape for shareholder activism in Japan, with a focus on the recent sequence of actions and reactions between Alphaleo Holdings (Alphaleo) and Inui Global Logistics (Inui, or the company). These events have significance as they pave the way for future shareholder activism in Japan.

Alphaleo, a private equity fund that holds the largest stake in Inui, successfully petitioned the Tokyo District Court in 2019 to make Inui hold an extraordinary shareholders meeting with the agenda of abolishing anti-takeover measures (the “measures”). Inui had initially refused on the grounds that the legality of the agenda was questionable. This was a surprising deviation from the court’s decision in Reno and Yorozu Corporation less than a year prior to the decision for Alphaleo. In the case of Reno, the court dismissed a similar petition from Reno, a domestic investment company, to set the abolition of anti-takeover measures as an agenda item in a shareholder meeting of Yorozu.

While the proposal was dismissed at the Inui shareholders meeting by an extremely narrow margin, the proposal itself, as well as the approval of the Tokyo District Court of the petition to hold a shareholders meeting, could open doors for more proposals by activist shareholders to abolish anti-takeover measures. Particularly if such activism is viewed as beneficial to all stakeholders, and not as a hostile takeover for the sole benefit of the activist shareholder. Though scepticism remains, as the rollcall of listed company shareholders becomes more global, and companies become more attuned to sound corporate governance principles, there could be a paradigm shift in the way Japanese companies interact with shareholders.

2.　Background

1. Basic legal principles relating to shareholder activism
   
   Despite the rarity of shareholder activism in Japan compared to other jurisdictions, shareholders have a wide range of rights under Japanese law. As in other jurisdictions, shareholders have the right to dividends and have voting rights. If a shareholder wishes to propose an agenda item at a shareholder meeting, they may do so if they have held at least 3% of the voting rights in a public company for more than 6 consecutive months. The agenda item can be on any matter shareholders are entitled to vote on. However, the company’s articles of incorporation can modify what matters shareholders can vote on.
   ＿
   If the demand of an entitled shareholder is not met, and the directors do not send a notice to all shareholders to call a general shareholders’ meeting within 8 weeks, the shareholder may ask the court to intervene. This is what happened in the case of Alphaleo and Inui, further discussed in Part 2 of this article.
   ＿
2. Status Quo in the Japanese Market
   ＿
   In other jurisdictions, such as the United States, shareholder activism is entrenched in the corporate landscape, especially following the financial crises of the early 2000s. In comparison, the environment in Japan has been slow to adapt to change. There are several reasons, such as the traditional view that companies are run for all stakeholders and not just shareholders, and the large number of cross-shareholdings among large Japanese conglomerates. Business decisions in Japan have also often been consensus-driven with little deviation from that group consensus approach.
   ＿
3. Stewardship Code and Corporate Governance Code
   ＿
   In 2014 and 2015 came the enactment of the Stewardship Code (SC) and the Corporate Governance Code (CGC), guided by the government’s Financial Services Agency (FSA).
   The codes, while not hard law, put pressure on institutional investors to be transparent, responsible, and explain their investment rationale. To engage in more depth in the affairs of their investee companies by exercising their vote. To participate in value creation, rather than passively agreeing with management. Thus, it is becoming harder for investors to blindly exercise their vote without considering the impact of their vote on their own stakeholders. It is no longer an option for shareholders to do nothing about underperforming investee companies.
   ＿
   Notably, the SC makes explicit reference to the enactment of anti-takeover measures such as poison-pills. The code encourages shareholders to vote against anti-takeover measures, save for in exceptional circumstances. The code explains that, in principle, most investors view anti-takeover measures as a company’s management trying to entrench their power. From an investor’s perspective, such measures are only justified when the company’s shares are being undervalued, leading to outside investors trying to take over the company at a lower price than the actual value of the company. In such cases anti-takeover measures are justified. Yet the majority (90%) of the anti-takeover measures in Japan have been in place for more than 10 years. Clearly not in place because of a temporary undervaluing of shares.
   ＿
4. Effects of the Codes and recent cases
   ＿
   The impact of the SC and CGC are gradually being felt. As mentioned earlier, there has been an increase in stock buybacks, increased dividends, and a decline in cross-shareholding among public companies since the Codes’ introductions. This has caused a decline in long-term, steady shareholders. Most importantly, this has resulted in more shareholders engaging with their investee companies. It has even opened doors for hostile takeover attempts. High profile exemplars of such changing attitudes include Takeda Pharmaceuticals disposing of their shareholdings in 12 companies in 2018. In 2019, Sony sold its entire stake in Olympus, under pressure from the activist fund Third Point. In the same year, in a move that shocked many, Olympus became the first major publicly listed company to have a U.S activist hedge fund – ValueAct Capital – take a seat on its board.
   ＿
   In terms of hostile takeovers, despite the rising activism in recent years, the number of attempts and successes are few. For instance, in January 2019, Itochu Corporation successfully bid for sporting giant Descent: making it the first successful domestic hostile takeover involving two large Japanese corporations. Much was owed to the fact that Itochu’s strategies to improve management were welcomed by other shareholders. Itochu already owned 30.44% of the shares in Descent, and a premium of close to 50% of market value made it an offer that was difficult for other shareholders to refuse. While Itochu had only intended to acquire up to 40% of shares, it bought twice as many shares as originally intended from other shareholders and ended up becoming the majority shareholder in Descent.
   ＿
   While unsuccessful, another notable case is travel giant HIS’s 2019 takeover bid for Unizo Holdings. HIS, as one of the largest shareholders but still only holding 5% of shares in Unizo, in July 2019 ambitiously bid to acquire up to 45% of shares. In August, a Softbank subsidiary Fortress Investment Group, bid a higher price than HIS, entering the race as a white knight. To further complicate matters, a U.S based private equity fund entered the race, making a higher offer than Fortress. In December, the matter took a dramatic turn when the first employee buy-out in the Japanese stock market was announced by Unizo. Whether this attempted EBO will be successful is yet to be seen.
   ＿
   These examples of companies meeting activist demands, and an increase (albeit small) of hostile bids and takeover attempts, might not portray an accurate picture of the Japanese corporate environment. There could be many activist campaigns that are not public knowledge. For instance, activist fund Strategic Capital demanded a shareholders meeting for Asanuma Corporation, with the agenda item requesting the disclosure of information regarding capital costs. Asanuma Corporation responded to the request even before a shareholders meeting was held. There could be many cases where things were settled earlier than a meeting, and so never became general public knowledge. The second part of this article discusses the case of Alphaleo and its impact on shareholder activism.

(Written by: Dai Iwasaki, Tomo Greer)

---

*This Column is provided for educational and informational purposes only and is not intended and should not be construed as legal advice.
For more information and questions regarding this Column, reach out to us.

Contact：Dai Iwasaki　Tel: +81-(0)3-6273-3544 (Direct) E-mail: dai.iwasaki@tkilaw.com
Contact：Tomo Greer　Tel: +81-(0)3-6273-3310 (Direct) E-mail: greer.tomo@tkilaw.com