ANALYSIS-Japan’s controversial cross-shareholdings get second wind after court battle

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TOKYO, Nov 10 (Businesshala) – An ongoing Tokyo legal battle could prompt Japan Inc. to hang on to cross-shareholding as a defense against hostile takeovers, calling for corporate governance reforms led by former prime minister Shinzo Abe. a blow.

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The development threatens to sow the seeds of uncertainty at a time when investors are trying to gauge new chief Fumio Kishida’s commitment to pro-market recovery and attracting international investors.

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A Tokyo district court ruled here last month that maker Tokyo Kikai Seisakusho could issue a poison pill, rejecting an injunction request from top shareholder Asia Development Capital (ADC), which pulled out after voting on the move. asked to block.

In the ADC’s absence, other shareholders approved the poison pill. Owned by Malaysian businessman Anselm Wong, Tokyo-listed ADC built up most of its 40% stake in a matter of weeks, enough to give it veto rights over key board decisions.

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Tokyo Kikai’s other shareholders include its business partners, reflecting common practice in Japan where companies take stake in partners to strengthen ties.

“Cross-shareholding and various types of special shareholders prevent management from serving the interests of common shareholders,” said Tokyo-based corporate attorney Stephen Givens.

Tokyo Kikai said that the ADC was excluded from voting here because it was an “interested party”, not including members of the company’s management.

But the ADC says shareholders with ties to Tokyo Kikai were allowed to vote – including insurers Sompo Japan, Mizuho Bank and Sumitomo Mitsui Banking Corp – indicating that the “interested party” definition was arbitrarily applied. it was done.

“Interested parties, if interpreted broadly, can also include shareholders with cross-shareholding or business interests,” said Kazunori Suzuki of Waseda Business School.

On Tuesday, the Tokyo High Court dismissed the ADC’s fresh appeal. The fund has appealed to the Supreme Court.

Sompo Japan said it holds shares of Tokyo Kikai for strategic purposes. It said its policy is to contribute to the sustainable development of companies seeking investment, and that it makes fair use of its voting rights with a view to corporate governance and compliance.

Mizuho and SMBC declined to comment on individual shareholding. Both banks said they vote for the investee firms fairly. Mizuho said her vote kept governance and long-term value in mind.

‘Forced’ bids, opaque holdings

Certainly, some economists, such as Ha Joon Chang of Cambridge University, say that cross-shareholding – such as the presence of workers on company supervisory boards in Germany – can serve as a check on the impact of short-term investors who ignore investments. Can do more- Emphasize dividends and buybacks.

Veteran M&A attorney Yo Ota, who is advising Tokyo Kikai, said it was appropriate to single out ADC for other shareholders to have a say on the acquisition, especially when they were unfavourable by the “coercive” nature of ADC’s bid. – When an investor feels compelled to sell or risk damaging their interests.

Ota said that like any other investor, the acquisition could hurt corporate shareholders.

The ADC said that corporate shareholders will not be pressurized as they hold the stake for non-investment purposes.

While Japanese companies have been gradually opening up their cross-shareholdings over the past two decades, a third of Japan’s $6.6 trillion stock market is still owned by cross-shareholders.

That’s down by half since the 1990s, according to the Nomura Institute of Capital Markets Research.

Under Japan’s Stewardship Code, only institutional investors are forced to disclose voting records at shareholder meetings.

In a recent survey of nearly 1,600 firms by the Japanese commercial law magazine “Shoji Homu”, over 60% of respondents said such affiliated shareholders held 40% or more of their registers.

Japan’s Code of Governance now requires companies to annually assess whether the purpose of cross-sharing is justified.

Lawyer Givens said companies that have been the target of successful hostile takeovers over the past year or two lack cross-stakeholders to protect them.

Many bankers said it would be impossible to eliminate the practice because companies are concerned about the price impact from the share sale and the possibility of associate shareholders being replaced by activists.

“It’s a business practice that you don’t see in developed Western countries where the environment forces companies to listen to their shareholders’ opinion,” said Ken Hokugo, director of the Pension Fund Association of Japan.

“The number of shares and the amount of shareholder capital that companies spend on it reflect the inefficiency and unattractiveness of the Japanese market.” ($1 = 113.3500 yen) (Reporting by Makiko Yamazaki; Editing by David Dolan and Lincoln Feast.)

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