More Proxy Fights Expected in Japan
June is both the peak of the rainy season and the season of annual shareholder meetings in Japan. Approximately three-fourths of the Japanese listed companies hold their annual shareholders meetings in late June. Until recently, annual shareholders meetings of Japanese listed companies had generally not been very active. In part, this may be due to a relatively high cross-shareholding ratio and the general inactivity of Japanese institutional investors up until the late-1990's. As a result of the collapse of the bubble economy in Japan, however, the cross-shareholding ratio has significantly declined and the shareholding ratio of foreign institutional investors, which are usually more conscious of shareholders' rights than Japanese ones, has significantly increased over the last 10 years. In addition, the prolonged sluggishness of the Japanese economy has made domestic investors more sensitive to the protection of shareholders' value and economic returns on stock investments.
One of the remarkable phenomena in recent years reflecting this trend is the increase of proxy fights. Although such contests had been rare in Japan, more shareholders have started proxy fights to challenge managements' proposals for such matters as election of directors, or even to make their own proposals for such matters as distribution of increased dividends. Generally speaking, the number of so-called "activists," who act proactively to raise the corporate values of stock companies of which they hold shares, is increasing against the backdrop of the rise of proxy fights. The February 22, 2007 victory of Ichigo Japan Fund A, a lesser-known investment fund with around a 10% shareholding in Tokyo Kohtetsu Co., Ltd., a JASDAQ listed structural 64 steel beams manufacturer, in a proxy fight over Tokyo Kohtetsu's management shocked the management of many Japanese listed companies, because a substantial number of individual shareholders unexpectedly delivered their proxy forms to the investment fund to vote against the management's proposal. As a result of the proxy fight, Tokyo Kohtetsu gave up the contemplated statutory stock exchange (kabushiki-koukan) with Osaka Steel Co., Ltd., a TSE-1 and OSE-1 listed steel manufacturer.
In this article, we will focus on some of the major issues surrounding proxy fights highlighted by several recent cases.
1. Right to obtain a copy of shareholders registry
A shareholder willing to start a proxy fight may wish to obtain the information of shareholders by exercising his/her statutory right to obtain a copy of the shareholders registry. However, the Companies Act allows a company to refuse such requests in certain cases, including cases where a requesting shareholder operates or engages in any business which is, in substance, in competition with the operation of such company. This "competitor exception" was not provided for in the Commercial Code, which had been the main body of the Japanese corporate law until the Companies Act came into effect on May 1, 2006. The lack of any apparent reason for introducing the "competitor exception" into the new Companies Act has, unsurprisingly, stirred a wave of litigations as parties seek a reasonable interpretation of this "competitor exception."
K.K. daVinci Advisors, whose initial request to obtain a copy of the shareholder registry of TOC Co., Ltd., a TSE-1 listed company, was refused by TOC prior to the tender offer for TOC shares, filed a preliminary injunction petition against TOC to request the Tokyo District Court to allow it to gain access to the shareholders registry. On June 15, 2007, the court dismissed the petition based on the "competitor exception," stating that wholly-owned sub-subsidiaries of daVinci Advisors operated a real estate business in Tokyo, the same business as TOC. Subsequently, on May 15, 2008, the Tokyo District Court dismissed another preliminary injunction case in which Harakosan Co., Ltd., which had expressed its intention to launch a hostile tender offer for the shares of Nihon Housing Co., Ltd., a TSE-2 listed company, demanded access to the shareholder registry of Nihon Housing, on the same ground as the TOC case. However, Harakosan won the case on appeal at the Tokyo High Court on June 12, 2008. The appellate court interpreted the "competitor exception" so narrowly that the interpretation might be conflict with the explicit language of the Companies Act. The Nihon Housing case will become the turning precedent which opens up shareholders registries to competitive shareholders in proxy fights and hostile takeovers.
2. Vote in writing and vote by proxy
Shareholders who do not attend a shareholders' meeting of a Japanese listed company can vote either in writing or by proxy. Typically, companies include written voting forms in the convocation notice packages sent to shareholders. In written voting forms, shareholders can check the box for each agenda item to express their decisions in substantially the same manner as written voting forms. These two methods have a lot in common in terms of functions and purposes. Solicitation for proxies must be conducted in accordance with the proxy solicitation regulations under the Financial Instruments and Exchange Law (formerly, the Securities and Exchange Law), which includes certain procedural requirements. However, solicitation for "for" or "against" votes in writing is not generally regulated and is not subject to the proxy solicitation regulations. Such discrepancy of regulatory regimes causes practical issues. For example, it is sometimes difficult to figure out when a shareholder should start to comply with the procedural requirements under the proxy solicitation regulations if the shareholder first solicits for "against" votes in writing and then starts solicitation for proxies as a series of contests.
3. Offer of economic benefits to shareholders in return for exercise of votes
The Companies Act prohibits a company from providing economic benefits in relation to the exercise of shareholders' rights. On the other hand, it has been common practice in many Japanese listed companies to give token gifts to attendees of shareholders' meetings so long as these fall within the ambit of social etiquette. In addition, some companies give token gifts to shareholders who exercise their voting rights in writing to encourage shareholders to return written voting forms irrespective of whether any given shareholder votes for or against the companies' proposals. These practices had generally not been considered problematic until recently. However, IDEC Corporation, shareholder who lost the proxy fight against Moritex Corporation, a TSE-1 listed company, filed suit to rescind the resolution of the shareholders meeting of Moritex on the grounds that Moritex's provision of prepaid cards to shareholders fell under the category of the prohibited provision of economic benefits. The value of each card was only 500 yen and Moritex provided one to each of its shareholders who xercised their voting rights, regardless of their support for IDEC's or Moritex's proposals or method of voting (in attendance in person, by proxy or by writing). The Tokyo District Court rescinded, on December 6, 2007, the resolution of the shareholders meeting of Moritex, holding that one of Moritex's purposes in providing prepaid cards was the acquisition of affirmative votes for Moritex's proposal.
4. Conclusion
Despite the importance of shareholders meetings from the viewpoint of corporate governance, there still remain many legal issues regarding proxy fights which need to reviewed or resolved. With more proxy fights to come in Japan, we expect to see more developments in this area in the near future.
This firm profile was written by Hiroshi Mitoma, Partner, and Kan Watanabe, Associate, Nagashima, Ohno & Tsunematsu.