Toshiba eyes shaking off ‘activist shareholders’

The Yomiuri Shimbun

17:19 JST, April 8, 2021

In response to a proposed buyout by British private equity firm CVC Capital Partners, Toshiba Corp. will give careful consideration to how much the buyout would be worth as well as other contents of the offer. If the company accepts the offer, its shares will be delisted, which is expected to give Toshiba more management flexibility.

Yet Toshiba is a company that falls into the category of “core industry,” meaning it is important from a national security perspective. Therefore, the buyout will require prior government screening for approval, a high hurdle to clear for the deal’s realization.

‘Reappointment uncertain”

Toshiba has been in a bind over how to deal with “activist shareholders.” In 2017, because the company had fallen into financial difficulties including a massive loss incurred by its nuclear power business in the United States, it increased its capital by ¥600 billion by issuing fresh shares.

Although its financial strength has improved significantly, foreign individual investors and investment funds have become its major shareholders.

As these funds have strongly called for a return on their investment, the company conducted a stock buyback, through which it could expect to raise its stock prices, in 2018.

Toshiba has also continually clashed with foreign shareholders, including investment funds, over the appointment of directors and its corporate strategies. Ten out of the 12 directors are outside directors, four of whom came from investment funds.

During a regular general meeting of shareholders held in the summer of 2020, Toshiba was called on by Effissimo Capital Management Pte Ltd., one of its large shareholders, to increase the number of outside directors further.

Toshiba opposed a further increase in outside directors, and the proposal was rejected. But only about 57% of its shareholders approved the reappointment of President and CEO Nobuaki Kurumatani as director.

In response to the escalating antagonism between Toshiba and the investment funds, a prevailing view in the financial market was that at the next general shareholders’ meeting, slated for this summer, “the reappointment of Kurumatani as president is uncertain.”

Helping hand in time of need

For Kurumatani, who has been caught in a predicament, the CVC’s proposal may be a helping hand in time of need.

If Toshiba accepts the offer and becomes a non-listed company, the pressure from current large shareholders who call for short-term profit would be eased, and there would be no fear of his reappointment as president being blocked. It would also become easier for him to craft medium- and long-term corporate policies.

CVC appears to expect that it can secure an eventual profit through relisting the stock or selling shares in the future, by holding Toshiba stocks while enhancing its corporate value in the long run. CVC will invite other investment funds to join the buyout deal.

A senior Toshiba official said Wednesday: “The proposal was a friendly one. As we have concluded that [CVC] is not necessarily calling for the replacement of the management, we have decided to hear what it would offer.”

Securing financing

If the buyout is realized, Toshiba will be required to manage itself in line with the intentions of CVC.

Toshiba was demoted to the Second Section of the Tokyo Stock Exchange in 2017 due to its deteriorated business performance and returned to the First Section in January this year.

As it has achieved its corporate restructuring to some extent, the company has envisioned a corporate strategy for its growth that considers renewable energy, such as solar and wind power, to be a new pillar of its businesses.

Depending on the intentions of CVC, however, it is conceivable that Toshiba management would be pressed to change its corporate policy.

As Kurumatani once served as chairman of CVC Japan, transparency will be required when Toshiba and CVC go into full-fledged negotiations. Even if the buyout is successful, the company might make a corporate decision that would be contrary to Toshiba’s interest, by prioritizing CVC’s profit and impairing Toshiba’s corporate value.

Core industry

When a foreign investor intends to acquire 1% or more of the stock of a Japanese company that is included in a core industry category the foreign investor is obliged, in principle, to notify the central government of such a deal in advance, to obtain approval. Based on the revised Foreign Exchange and Foreign Trade Law, 14 industries, including aircraft, nuclear power, electricity, and medical supplies related to infectious diseases, have been designated as core industries. Toshiba is a core industry company.

The screening for such an inward foreign investment will be conducted by the Finance Ministry and the Economy, Trade and Industry Ministry. The screening period can be up to four months.

If there is a possibility of causing problems in national security, a council at the Finance Ministry will hear experts’ opinions, while the ministry, in the name of its minister, can recommend or order a change or even a cancellation of such an investment plan.

To avoid excessively blocking foreign direct investment, however, the ministry has created exemptions from the prior notification and approval requirements for certain investors, on condition that: 1) they themselves or officials close to them do not serve as directors; 2) they do not propose the sale or discontinuance of key businesses at shareholders’ general meetings, and 3) they do not seek access to confidential technology or information.

But if a foreign investor intends to take a controlling stake of a core industry company, there will be no exemptions from advance notification and approval of their buyout plan.

Economy, Trade and Industry Minister Hiroshi Kajiyama said at a press conference on Wednesday, “It is important that a corporate system is built so that those businesses important for our country’s economy and society could be maintained stably. As [Toshiba] has been involved with the development of a variety of infrastructure, we want to pay close attention to the buyout.”