Stephen Givens is a corporate lawyer based in Tokyo.
As Japan's rainy season descends and shareholder proposals for June-end annual general meetings begin to trickle in, Hong Kong-based LIM Advisors' approach to unlocking value in Japanese companies with low price-to-book ratios is, if nothing else, a diverting contrast to the usual menu of activist demands for higher dividends and share buybacks.
Rather than delving into balance sheet economics to persuade fellow shareholders to vote for a dividend or share buyback, LIM seems to be simply lobbing flares over the wall that illuminate corporate scandals within the target company, but without linking the proposals to demands for concrete action like a dividend or stock buyback that would have a direct economic impact.
No doubt, shareholder proposals that call unwelcome attention to corporate scandals create stress and embarrassment for target company executives and can be entertaining for spectators. The real question is how they translate into the ultimate goal of unlocking value.
LIM's proposals against Heiwa Real Estate, which out the cozy tribal relationship between Heiwa and the tenant of Heiwa's largest office building, the Tokyo Stock Exchange, are an interesting test case.
LIM has proposed charter amendments to prohibit Heiwa from employing anyone who has worked at JPX, the Tokyo Stock Exchange's parent company, for more than five years and to require at least two-thirds of its board members to have 10 or more years actual real estate experience. A related proposal would require Heiwa to divest its holding of JPX shares.
The background is that for generations Heiwa has served as an amakudari -- descent from heaven -- landing spot for TSE old boys, who typically hold the positions of chairman and president and two or three additional board seats. The wet relationship between Heiwa and TSE extends to deeply discounted rent for the TSE building in Kabutocho.
While cozy relationships of this kind were standard procedure once upon a time, they are awkward in the current era of corporate governance reform, especially when the prime beneficiary is supposed to be a standard-bearer for enlightened governance. If LIM's objective is to make top management at Heiwa and JPX squirm, it has clearly succeeded.
But, so what? How does this translate into making money for LIM's fund investors? That the manager of LIM's Japan portfolio is a former Nikkei reporter specializing in corporate scandals invites speculation that he simply misses his old job.
A closer look at Heiwa's shareholder composition and dynamics, however, suggests that there may be method in the madness. Put simply, de-legitimating Heiwa management provides its "loyal" domestic shareholders with a cover for betraying Heiwa -- by voting against management or selling their shares to a hostile bidder.
Reading LIM's proposal as a setup punch for a change of control is further supported by another item on next month's AGM agenda -- the renewal of Heiwa's poison pill. The poison pill was last renewed in 2018 by a slim 55.8% margin. Since then, the shareholder composition has changed to include more foreigners at 38.5% and Simplex, a Japanese fund managed by former Nikko Securities bankers, which now owns a stake in excess of 10%.
By pointedly reminding Heiwa's shareholders that the company is out of step with the times on the same ballot that calls for a vote on the poison pill, LIM has cleverly increased the odds that the takeover defense will be abolished at the AGM next month, whether its own proposals pass or not.
Successful abolition of the poison pill, in turn, should be a green light to put control of Heiwa in play. One likely scenario is that 10% shareholder and joint venture partner Mitsubishi Estate will take this as the cue to "come to the rescue" and acquire Heiwa's portfolio of buildings in Kabutocho, just across the tracks of Tokyo Station from the iconic block of Mitsubishi Estate buildings in Marunouchi.
Aerial view of Tokyo's Marunouchi area: Kabutocho is just across the tracks of Tokyo Station from the iconic block of Mitsubishi Estate buildings in Marunouchi. © Getty Images LIM's proposal, in short, could well be the catalyst for a bidding war like the one that lifted the share price of a comparable real estate company, Unizo Holdings, threefold last year.
Outside of Japan, activist funds like Third Point and Elliott Management have had their greatest impact and financial success by serving as catalysts for M&A transactions and dispositions that generate hefty control premiums.
In Japan, however, protective shareholder structures and unspoken taboos against hostile takeovers have, so far, limited the activist's toolbox to more modest items like dividend and share buyback proposals that fall short of full-blown changes of control.
But times are changing. A flurry of quasi-hostile bids and bidding wars in the last year has shown that the realm of possibilities is expanding as old mentalities and inhibitions begin to weaken. Management can no longer expect loyal shareholders to unquestioningly close ranks in the face of an unwelcome bid.
A loyal shareholder's willingness to turn down an attractive premium in order to protect the jobs of target management will be severely tested if the latter are shown to be corrupt, incompetent or generally behaving as corporate executives once did in the era of black-and-white televisions.
LIM Advisors' proposal creatively extends the activist's repertoire as catalyst to unlock trapped value.