Activist investors operating in the Japanese market have become bolder in their campaigns, a trend visible in the first half of 2018. Spurred on by the increasingly widespread adoption of 2014’s Stewardship Code and the growing amenability of both domestic and foreign institutional investors to external ideas, the number of companies receiving board-related and balance sheet demands reached record levels in the first six months of 2018 relative to any previous comparable periods in the past five years.
Whereas in the recent past, most activism in Japan was limited to public letters and shareholder proposals, activists are no longer shying away from advancing demands for board seats and even launching proxy contests. And their operations have become more elaborate.
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“There have been continued developments in the activism landscape in Japan, including campaigns focused on business improvement, improving margins and cutting costs, and campaigns focused on improving corporate governance, campaigning against poison pills, and calling for independent directors to hold companies accountable,” Seth Fischer, chief investment officer of Oasis Management, told me.
Oasis has already publicly targeted five Japanese companies this year, including Katakura Industries and Alpine Electronics, where it initiated proxy solicitations. In the whole of 2017, it advanced public demands at four companies. “It’s been an exciting year for shareholder engagement in Japan, with significant developments and increased votes against management by many different types of shareholders, including domestic asset managers,” Fischer said. Oasis may soon see an ally join its efforts at Alpine. Elliott Management took a 5% stake raising the possibility that it would push Alpine parent Alps to increase its takeover offer.
With Jeffrey Ubben’s ValueAct Capital Partners making its first activist investment in Japan this year, Oasis launching two proxy contests, Elliott cautiously testing the waters, and a host of old and new activists submitting shareholder proposals, the country appears to be an increasingly fertile ground for activism.
At optics manufacturer Olympus, ValueAct is expected to bring its brand of amicable, behind-the-scenes activism. Whether it succeeds in gaining board representation – as it has with previous campaigns in the U.S. and the U.K. – represents an important test of the country’s openness.
According to Activist Insight Online, as many as 15 Japanese companies were publicly subjected to board-related demands – which include director changes and greater independence – in the period from January 1 to June 30. During the same timeframe last year, 9 companies were targeted with such demands, which at the time represented a record.
Balance sheet demands, which include requests for dividends and share buybacks, remained in vogue, unsurprisingly given the cash-rich state of many Japanese companies. In the first half of 2018, a record 11 issuers received requests for returning more cash to shareholders. Of note, only one additional company needs to be targeted with a balance sheet demand in the next six months to match last year’s record of 12.
A range of investors feel success now is more likely, in no small part because both management teams and domestic institutional investors are changing their behavior.
“Affiliated with large, established financial institutions, those managers had historically been a silent supporter of Japan Inc, who hated to say anything embarrassing to Japanese corporate managers,” Hideaki Hattori, a fund manager at Sparx Group, which this January submitted a proposal at Teikoku Sen-I seeking to triple the dividend, tells me. “Because of the Stewardship Code, however, they are forced to be accountable for their voting decisions.”
“Managements are far more receptive to listening to shareholders than they were even three years ago,” Joe Bauernfreund, CEO of Asset Value Investors, added in a recent interview. “We speak to other activist investors in Japan and they say the same thing as well.”
Domestic institutional investors themselves are raising the pressure on issuers to improve their corporate governance by gradually tightening the circumstances under which they support incumbent boards. Mitsubishi UFJ Trust and Banking and Sumitomo Mitsui Trust Bank will oppose the election of boards that do not have at least two outside directors.
That is especially important in Japan, where change is stymied by the prevalence of cross-shareholdings – an issue being tackled by the Japanese government – and strong founders.
Despite an increase in activity and more complex campaigns in recent years, success for activists in contested situations is still rare. Oasis lost both its proxy contests, while Sparx and Asset Value did not see their resolutions for higher dividends adopted. Yoshiaki Murakami won a proxy battle for a board seat at Kuroda Electric in 2017, but his large 37% stake and the support of Sessa Partners were instrumental.
“Japanese investors, whether retail or domestic institutions, are still conservative. They don’t want to make any changes in their voting patterns,” Masakazu Hosomizu, a portfolio manager at RMB Capital Management, told me. “Domestic institutions need to disclose how they voted and when they go against management they need a really strong case.”
RMB waged a proxy fight for a board seat at entertainment firm Faith after failing last year to secure a higher price for the company’s takeover of Nippon Columbia. Hosomizu received around 20% of the votes present for his election, including RMB’s 11.7% stake. More than one-third of the stock is held by the founding family.
Yet activists may not care about winning, at least for now, if they can raise awareness about specific problems. “A few years back, shareholder meetings were quiet, but when people like us raise issues, people are aware of what’s going on at the company,” Hosomizu said. “I think, these are good things, even if funds are losing.”
Last week, Reuters reported that the Securities and Exchange Commission (SEC) shelved plans to implement a mandatory universal proxy card despite publicly saying it was still a priority. Among practitioners, the news is unsurprising given that its big proponent, former chairman Mary Jo White, left the scene and the new chairman, Jay Clayton, apparently views it as a deterrent to boosting initial public offerings.
“I think it all goes to the composition of the SEC,” Aneliya Crawford, partner in the Shareholder Activism group at Schulte Roth & Zabel, tells me. “Most of us expected that the SEC would likely not [consider mandating the universal proxy card.]”
Typically, shareholders and activist investors are in favor of a mandatory universal proxy card, as this allows investors voting remotely to choose the best candidates from both incumbent and insurgent slates instead of picking one side only. Companies argue that this would lead to an increase in proxy fights and give more power to activists. Yet this proxy season saw the use of the universal proxy card twice at companies’ initiative: SandRidge Energy in its battle with Carl Icahn and Mellanox Technologies in its confrontation with Starboard Value, although both conflicts were settled.
“There is no empirical evidence that universal proxies favor one side or the other in a proxy contest,” Amy Borrus, deputy director at Council of Institutional Investors, a non-profit organization promoting shareholder rights, tells me. “This really boils down to a fairness issue – of making sure that investors who vote by proxy have the same voting options as investors who vote in person.”
In the absence of a regulatory framework, shareholders may apply pressure on companies to change their bylaws to mandate the universal proxy card in contested elections in the name of good corporate governance. A precedent has been set by the wide adoption of proxy access, which allows big and long-term shareholders to submit a limited number of candidates for election to the board by piggybacking on the company’s corporate election machinery.
“If we see companies increasingly using universal proxies just in situations where they believe they have a tactical advantage, I think that may provoke interested shareholders to push for bylaw amendments,” Crawford remarks. Such a trend is not imminent, she acknowledges, and may involve structural difficulties as a blanket solution may not be possible. “As they say, the devil is in the details,” Crawford notes.
Quote of the week comes from Elliott Management, which publicized a letter it had sent to the board of German conglomerate ThyssenKrupp, responding to accusations - made by former Chairman Ulrich Lehner in an interview with Die Zeit - of “placing lies in public,” engaging in “psychological terror” and “harassing families and neighbors.”
“Any reasonable reader of this interview would have concluded that he was accusing Elliott of engaging in such behavior. To be clear, any such accusation is categorically untrue and is defamatory. As Professor Lehner could not have had any evidence for such accusations, we assume that he made them maliciously or, at least recklessly.”
Article by Activist Insight