Land of the Rising Activists?
What the Future Holds for Activist Shareholders in Japan

(This article is published in 2 parts: the first part focuses on the current climate of shareholder activism in Japan prior to the landmark case of Alphaleo Holdings and Inui Global Logistics. The second part focuses on the Alphaleo decision and its implications.)

Part 2: Alphaleo Holdings v Inui Global Logistics
– a Paradigm Shift in the Activist Landscape? –

1.　Background

Alphaleo purchased shares in Inui in 2014. It presently holds 30.34% of all shares. All have been acquired on the open market. Soon after Alphaleo became a shareholder, Yasuyuki Inui (Mr. Inui) was appointed as representative director of the board. Under this new leadership, Inui began making significant losses, falling short of the company’s forecasted sales projections. In June 2019, at an ordinary meeting of the shareholders, anti-takeover measures were approved by shareholders. In response to such a resolution, as well as to the company’s ill financial state, Alphaleo submitted a proposal to abolish such measures. It also called for the dismissal of Mr. Inui, a reduction in directors’ compensation, conducting share buybacks, and the paying of dividends of 38.28 yen per share.

In October 2019, a notice of a shareholder meeting was sent out. Strikingly, the abolition of the anti-takeover measures was not on the agenda. Controversially, Inui claimed that the legality of calling for a shareholders meeting to vote on anti-takeover measures was questionable, and not in accordance with the company’s articles of incorporation. In response to the company’s failure to include the anti-takeover measures on the agenda, Alphaleo successfully petitioned the Tokyo District Court to call a shareholders meeting to discuss that agenda item and the court ruled in favour of Alphaleo.

As discussed in Part 1 of this Article, this deviated from the court’s decision in Reno and Yorozu Corporation, less than a year prior to the decision of Alphaleo. In the case of Reno, the court dismissed a similar petition from Reno, a domestic investment company, to set abolition of anti-takeover measures as an agenda item for a shareholder meeting of Yorozu.

The official court decision is unpublished, but it is speculated that the decision likely came down to two things: a) the attitude and the view by the courts of the motives and moral grounds of the parties, and b) the interpretation of the articles of incorporation.

1. Attitude of the court of the motives and moral grounds of the parties
   
   In distinguishing between the two seemingly identical cases of Reno and Inui, where both investors demanded to set the abolition of anti-takeover measures as an agenda item for a shareholders meeting, we believe that the court’s view of the parties motives and moral grounds were important.
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   Reno is associated with the ‘Murakami Fund’: one of few activist funds in Japan. They have been active with all their investee companies. For instance, in January 2020 they made a hostile bid for an ex-Toshiba unit.
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   Contrastingly, it could be said that the ‘villain’ in the Alphaleo case could be the directors acting in self-interest by enshrining their powers. The anti-takeover measures implemented by Inui could easily be aimed at Alphaleo, making the courts unsympathetic to a management team paying high compensation for themselves while the company makes a loss. As discussed later, the total dividend amount divided among all shareholders was half of what was paid as director’s compensation to Mr. Inui.
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2. Interpretation of the articles of incorporation
   
   The relevant article in Inui’s articles of incorporation states that a) the company needs the approval of the shareholders to establish anti-takeover measures and b) the measures may be abolished anytime with the decision of the board of directors: not explicitly stating what the shareholders’ powers were in relation to abolishing anti-takeover measures were. Nevertheless, the court interpreted the articles of association and ruled in favour of Alphaleo, allowing Alphaleo to call for a shareholders meeting to decide on whether to abolish anti-takeover measures.
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3. Allegations by Alphaleo leading to the shareholders meeting
   
   With the court’s blessing, in calling for a shareholder meeting, Alphaleo released a 27-minute-long video, explaining the long-spanning tension and disputes between the two companies. A voice-recording of Mr. Inui was included asking if Alphaleo would sell its stake. The video goes on to explain that when Alphaleo demanded the company auditor to investigate such matter the auditor responded that there was no evidence of an offer to buy out, and thereby eject, Alphaleo.
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   In July 2018, compensation was paid inappropriately to two directors (founder members). In 2019, they announced that dividends will be paid out at 46 yen per share: yet at the end of the fiscal year, because of the company’s poor financial performance, just 1.72 yen per share was paid to shareholders. The total dividend amount divided among all shareholders was appr. 42 million yen, paling in comparison to the 75 million yen paid as director’s compensation to Mr. Inui.
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   Alphaleo also stated that 35% of all shareholders had signed blank proxy forms for passing the resolution to implement the anti-takeover measures. This after being requested by Inui to leave the proxy names unfilled.
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   In summary, Alphaleo claimed that the management of Inui was incompetent, and could not fulfil its fiduciary duty to shareholders. It called for the anti-takeover measures, which the only purpose could be for the self-protection of board members and the entrenchment of their power, to be abolished.
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4. Result of the shareholder meeting
   
   Though it obtained permission from the court to hold a meeting, Alphaleo was unsuccessful in passing a shareholder resolution to abolish the measures (47.6% voting for Alphaleo’s proposal and 52.4% against).
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   However, the row between the two companies is far from over. In December 2019, Alphaleo filed another case for the dismissal of Mr. Inui for false disclosures in the annual securities report required from listed companies. The case is currently pending.
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   Fresh claims were made this month (June 2020). In response to Inui’s decision to hold a shareholders meeting to vote on whether certain information requested by Alphaleo should be disclosed to Alphaleo. Alphaleo filed for an injunction to prevent the company from holding such meeting: claiming that a meeting with such an agenda item was against the company’s articles of incorporation, and it goes against the fundamental rights of shareholders to be treated equally.
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   Activists in Japan and abroad will be watching for the results of these cases. Whether the court takes the view that this is simply a case of a self-interested activist, or alternatively, the management are acting in breach of their fiduciary duty by entrenching their power and disrespecting shareholder rights, will determine the outcome.

2.　Implications for foreign investors

Save for exceptions regarding investment in sensitive industries, there is nothing restricting foreign shareholders from investing in Japanese companies. There is currently a high level of foreign shareholding in public companies. Some high-profile activist U.S funds have taken stakes in public Japanese companies; such as in Olympus by ValueAct as mentioned above.

The case of Alphaleo showed that, while subject to the Articles of Incorporation, shareholders have the power to call a shareholders meeting to abolish anti-takeover measures. This could allow shareholders who command enough support from other shareholders to dismantle power held by entrenched management, and demand higher share value creation through better governance. It shows the changing attitudes of Japanese courts towards so-called activist shareholders. Especially if the shareholder proposals have genuine grounds for call for better management and governance, and management members could be seen as trying to solidify their power at the expense of other stakeholders, courts will be more sympathetic.

One could take from the few examples discussed in this article that shareholder intention, and whether its proposals or takeover bids benefit other stakeholders, and not just the proposing shareholder itself, is vital to the success of its activist proposals or takeover measures, especially if the case comes before the courts. With changing attitudes of the courts, an increase in shareholder proposals, activists successfully appointing or dismissing directors, and companies getting rid of their poison pills, could foreign companies now to look to Japan as a fertile ground for activism? Alternatively, is it still too early to say that this is a new age of shareholder activism in Japan? Or as critics of such a movement fear, is this the beginning of Japanese corporations focusing on short-term profits and gains to give maximum shareholder value, at the expense of long-term gains for all stakeholders?

(Written by: Dai Iwasaki, Tomo Greer)

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*This Column is provided for educational and informational purposes only and is not intended and should not be construed as legal advice.
For more information and questions regarding this Column, reach out to us.

Contact：Dai Iwasaki　Tel: +81-(0)3-6273-3544 (Direct) E-mail: dai.iwasaki@tkilaw.com
Contact：Tomo Greer　Tel: +81-(0)3-6273-3310 (Direct) E-mail: greer.tomo@tkilaw.com