Battle lines are forming once again in the fight for control of Toshiba (TOSBF) , and the highest-profile activist tussle in Japan shows the extent of improvements in both the treatment of minority shareholders and corporate governance reforms at "Japan Inc."
To put it bluntly, they haven't gone far.
This week, the company's second-largest shareholder has demanded an extraordinary general meeting to vote on two proposals. Singapore-based hedge fund 3D Investment Partners says it wants shareholders to have the chance to vote on the company's decision announced in November that it would split into three companies.
The first proposal, which 3D says it would vote against, changes language in Toshiba's articles of incorporation to require the three-way split to go ahead. The second proposal urges the company's strategic review committee to rethink the split and ensure that "all alternatives are fully considered" for what the company should do.
3D says the strategic review committee, set up in June, didn't ask for bids for the entire company or any of its parts and didn't contact any potential buyers. What's more, management "terminated discussions prematurely" with a private equity company that wanted to buy a large minority stake, 3D says.
Instead, the activists say, there was a backroom decision to make cosmetic changes in the corporate structure that are designed to maintain the status quo and keep current management in place. The split plan equates to "some minor reshuffling of business units into different corporate entities," 3D states. But that rearrangement won't solve any of Toshiba's problems, 3D maintains.
Toshiba still will need to put the three-way split decision to shareholders for approval. Approval will require a two-thirds majority, the same as would be required for the change in the articles of incorporation that 3D has proposed. In effect, the 3D vote would give shareholders a chance to express their opinion on the plans without wasting time and effort pushing ahead with the split before it is approved. The 3D vote would happen a year ahead of the annual general shareholder meeting in 2023, when the official vote would be held on the breakup plan.
Like Toshiba's largest shareholder, Effissimo Capital, 3D Investment Partners was founded by Japanese active managers using Singapore as a fund-friendly base to invest back into Japan. 3D was founded by CEO and CIO Kanya Hasegawa, a veteran of Paul Tudor Jones's hedge fund Tudor Investment as well as the distressed situations arm of Goldman Sachs (GS) .
Toshiba said in November that it will split by 2024 into an infrastructure services company, an electronic parts company and a company that will hold its stake in Kioxia Holdings, a flash memory maker. That third business would retain the Toshiba name and convert the Kioxia shares into cash.
After 3D issued its statement, Toshiba management said it is "carefully considering" its response. But every step of the way, that kind of face-value levelheadedness has been characterized by behind-the-scenes efforts to defeat the activists, who hold around 30% of the company's shares.
Toshiba has scheduled an extraordinary general meeting for March, but no one as yet knows what that will entail. The activists suspect the company will propose a vote requiring a simple majority vote approval to proceed with the split, though that vote would still require two-thirds approval in the end.
The net result of all the corporate activity, outside shareholders say, is to discourage them from retaining their stakes, partly through delay tactics that push decisions into 2023 and 2024. The activists would like to cash out through a sale of all or parts of the company or see the company taken private.
The Canadian alternative investments manager Brookfield was reportedly in advanced talks to buy a minority stake in Toshiba. The Japanese company reportedly walked away from talks with several suitors, with one private equity company calculating that a take-private deal could be done at ¥6,000 per share.
Toshiba shares closed Friday at ¥4,844. They have climbed 68% since the start of last year, but are still at one-third of their 2007 highs, pre-Lehman Brothers and a string of scandals at the company.
Toshiba, with a history dating back to 1875, has been plagued by problems since 2015, when it confessed that it made up US$1.2 billion in profits over the previous seven years. Then in 2017, it took a US$6.2 billion hit to earnings after massive losses at its Westinghouse Electric business building nuclear power plants.
Activists bought into the company heavily in its darkest days, when it sold shares in 2017 at ¥2,628 to raise desperately needed capital. There are six activist funds among its 10 largest investors. In recent history, company management seems to have done anything it can to fight against them every step of the way.
But unlike most Japanese companies, the activists at Toshiba have real power. Last March, shareholders won a landmark vote initiated by Effissimo. It was the first time such a shareholder-proposed initiative had passed at a major Japanese company, as I outlined then.
The outside shareholders pressed their advantage. The activists managed to unseat Toshiba's chairman in a shareholder vote last June, also an unprecedented event at a major Japanese company as I explained at the time. The company's CEO stepped down last April as well, leaping before he was pushed, due to suspicions of conflict of interest surrounding a bid for Toshiba by that CEO's former employer, CVC Capital Partners.
The Effissimo vote successfully demanded an independent investigation into the behavior of the company. Three outside lawyers concluded in bombshell findings that management colluded with Japanese government officials to target the outside investors. The report found Yoshihide Suga, who just stepped down as Japan's prime minister, met over a private breakfast with the Toshiba CEO, agreeing that the Japanese Ministry of Economy, Trade and Industry should "beat" the shareholders for a while before the company stepped in to suggest a compliance committee "to try and bring the curtain down."
The report also found that the Japanese ministry contacted 3D Investment Partners and warned it not to vote alongside Effissimo, stating that "if you are barbecuing next to your neighbor when there is a big fire, it may not be enough." The ministry effectively threatened to launch enforcement action if activist shareholders voted against Toshiba management's plans.
This fight is intricate, but shines a fascinating light on the kinds of machinations that surely go on at every major Japanese company. It was common in both Japan and South Korea for companies to cooperate with government in post-war recovery efforts, which were supremely successful. But that cozy relationship has transitioned into collusion and insider dealing at the highest levels of corporate Japan, problems that the Toshiba tussle so clearly reveals.