Kap Su Seol, Research Analyst
Japan’s biggest film studio, Toho Co. Ltd.’s Feb. 21 acquisition of Toho Real Estate Co., Ltd. offers a sneak preview of how battle lines are being drawn between the country’s corporate powers and governance advocates. Toho, owners of 58% of Toho Real Estate, bought the remaining shares for 16.6 billion yen. Toho turned its once-majority held affiliate into a wholly-owned unit for a bargain price. The parent’s own conservative appraisal put the value of the affiliate’s real-estate assets at 64 billion yen. Prospect Asset Management, a Tokyo-based activist fund which owned about 5.6% of Toho Real Estate, estimated the value of the unit’s top two assets alone at 93 billion yen. The activist fund protested the bid and failed. In Japan, there is little legal recourse for minority shareholders like Prospect Asset in this scenario.
In the 1960-1980s, it was not unusual for Japanese conglomerates to spin off affiliates into public companies while still maintaining controlling ownership stakes. Though very inefficient, these arrangements, called keiretsu, or networks of affiliates, were quite lucrative. These affiliates not only operated as part of their parents’ keiretsu networks, but also paid them high dividends. The keiretsu system, inherently susceptible to conflicts of interests, is a severe impediment to outside shareholder rights.
The global Great Recession of 2008-2010 has heightened the already urgent need for Japan to restructure its economy. In response to this pressure, many Japanese corporate giants have begun to acquire affiliates to revamp their capital bases. According to Tokyo Stock Exchange, in 2010 alone, 37 of a total of 68 companies that were delisted were merged into their parents. In 2011, 28 out of the 52 delisted companies were absorbed into their parents, and in 2012, 21 out of 56.
Prospect Asset’s failed protests were still meaningful because they openly challenged the keiretsu network within the broader context of corporate governance and minority shareholder rights. Prospect Asset was not alone. Since October 2012, other minority shareholders have banded together in opposition to a joint bid for Japan’s largest cable TV operator J: Com by KDDO Corporation and Sumitomo Corporation. The two companies together control about 70% of J: Com and have plans to turn it into a 50/50 joint venture after the purchase.
It is likely that more and more minority shareholders will challenge the old-guard networks in Japan. Without a doubt, reforming the keiretsu system is pivotal to Japan’s broader national agenda to restructure its economy. Optimally, the country’s lawmakers and regulators would support activist owners by introducing new regulations that rigorously protect minority shareholders’ rights.