More Poison Pills Expected with Japan’s Proxy Season

Expect Japanese companies to champion a strong defense again at annual shareholder meetings this year.

As meeting season gets underway—in Japan, a majority of companies hold their meetings in June, usually within a few days of each other—defensive measures seem to be the hot topic for the second year in a row. Shirou Terashita, chief operating officer of investor-relations firm IR Japan, predicts that at least 50 companies will put takeover defenses to a vote; 101 companies approved poison pills last year. “We are very busy, especially giving advice regarding takeover defenses,” he says.

Terashita

IR Japan doesn’t officially disclose its clientele, but the firm advises 90 percent of major public companies in Japan, including some of the largest auto, pharmaceutical and consumer goods manufacturers in the nation. IR Japan says it helped one large beverage company fend off a takeover threat by the U.S. hedge fund Steel Partners.

Shareholder activism took wing in Japan two years ago, when three companies saw their proposals voted down by shareholders—an unprecedented act that left Corporate Japan astonished. Since then, companies have scurried to get tips on how not to get a proposal rejected.

Specifically, Terashita says, half of the poison pill tactics will be presented in two proposals: one asking for an amendment to the articles of incorporation to allow such takeover defense tactics, and the other asking for the poison pill proposal itself. Pretty much all of the poison pills will be “advance warning” defenses, which will give corporations time to review and strategize should a takeover bid arise.

Notably absent from the poison pill craze will be large Japanese companies, Terashita says. “Large companies don‘t think the takeover defense proposals will pass because they have many foreign investors,” he says. Such companies may try to bypass shareholders by asking board members to approve a takeover defense. Fuji Film and Nippon Steel Corp. have already taken this approach. In general, however, Terashita doesn’t believe many companies will take the legally risky approach of passing a poison pill with just the approval of the board.

U.S.-based proxy advisory firms also believe takeover defense proposals will continue to be big, due to the introduction of Japan’s new corporation law in 2006. Marc Goldstein, representative director for Institutional Shareholder Services Japan, says companies that put up these takeover defenses have certain traits.

“They are companies that are undervalued when you look at the price-to-book ratio, and companies with low profitability and very often long, proud histories that haven‘t kept up with the times, coasting on past glories,” Goldstein says. “Or they may be trying very hard to keep up with the times, but they are finding the competitive environment very different from what it used to be.”

Goldstein

Unfortunately, Goldstein says, many companies in Japan have such traits, and they are the ones investment funds target. “A high percentage of companies implementing takeover defenses are closed-style, inward-focusing domestic companies in industries like railroad and food processing, not ever exposed to international competition,” Goldstein says. “Those are the most afraid of a hostile takeover.”

“A high percentage of companies implementing takeover defenses are closed-style, inward-focusing domestic companies ... not ever exposed to international competition.”

—Marc Goldstein

Director,

ISS Japan

There are many Japanese companies that can see substantial re-evaluation with some restructuring, such as exiting from non-core businesses, Goldstein says. He points to the example of camera-maker PENTAX, which is planning to become a subsidiary of Hoya. PENTAX’s management team was trying to come up with ways to block a proposed buyout by Hoya. “PENTAX is one of those great Japanese companies that have great technology and poor profitability,” Goldstein says. “They have good products, but don’t have the resources to compete. So PENTAX isn’t in a good position … There are lots and lots of companies like PENTAX that want to protect the interests of the insiders rather than maximize shareholder values.”

Poison Pills, Japanese-Style

Frank

Jun Frank, senior proxy research analyst for proxy advisory firm Glass, Lewis & Co. based in San Francisco, says Japan’s takeover defenses are generally better than those in the United States. “Japanese companies are trying to make the defense shareholder friendly, or at least make it appear shareholder friendly,” Frank says. Frank also notes that most of the provisions expire in just a year and must go through shareholder approval to be implemented again.

“Historically in the U.S., companies would introduce poison pills to be placed for 10 years, and shareholders have not had the opportunity to vote on them,” says Robert McCormick, vice president of proxy research and operations at Glass Lewis.

Why give Japanese companies such clear sunset clauses for takeover defenses? According to a government study, board members at most Japanese companies are insiders, and “Many investors don’t feel comfortable granting the board excessive authority,” Frank says.

Goldstein shares Frank’s view. Goldstein says Japanese takeover defenses have higher triggers than those in the United States; a common standard is to activate a poison pill when a raider acquires (or announces intentions to acquire) 20 percent of company stock. In the United States, that trigger is usually only 10 to 15 percent.

As an important backdrop to the proliferation of poison pill proposals is the unmistakable presence of active foreign investors like Steel Partners, plus new deregulation laws that improve the climate for moves such as “triangular mergers,” which make corporate buyouts easier for foreign firms.

Goldstein suspects there may be some degree of paranoia in the poison pill craze, as evidenced by the powerful business-lobbying group Keidanren arguing for more restrictions around triangular mergers.

“Keidanren thinks these foreign vultures are just after Japan’s technology,” Goldstein says. “Do you think these companies will buy up a Japanese company’s good technology and then shut them down? It makes no sense. They will buy these businesses and expand them overseas.”

Goldstein says companies that are most global in their operations and their management team are the ones that are least fearful and, therefore, don’t feel a need for poison pills.

Terashita, on the other hand, echoes Keidanren’s fears: “Large-cap companies will be the ones targeted, and I think Keidanren’s response is reasonable.”

But then, Terashita doesn‘t view Steel Partners as a vulture either. “Companies that become takeover targets are being caught off guard, and you can’t blame funds for exploiting you if you’re the one not being alert,” he says.

Frank says that although takeover defenses may be perpetuated by those like Steel Partners, “funds like Steel Partners bring discipline to the market,” he says. “Steel Partners might influence the companies to do more effective and efficient management.”