Japan’s stance on foreign investment has been redefined by a conflict between the country’s most notorious activist shareholder and the top-secret submarine technology maker responsible for one of the biggest rifts between Washington and Tokyo in the Cold War.
The struggle between Yoshiaki Murakami and Toshiba Machine, which will come to a head at Friday’s extraordinary general meeting, is a milestone in Japan’s efforts to improve corporate governance and tolerance for aggressive activism.
The case that has taken control of Japanese regulators also leads to a stricter legal system for investors outside of Japan.
With new rules for foreign investors coming into force in May, the Treasury Department closed a gap that allowed Singapore-based Murakami to act as a domestic investor with vehicles from Tokyo.
The tide has already turned against Mr. Murakami. Toshiba Machine’s share price has halved in the market crisis triggered by the coronavirus crisis in the past two months, prompting its fund to offer its offer in the event of a ¥ 12 billion ($ 108 million) share buyback agree. Toshiba Machine rejected the proposal and Mr. Murakami is now facing the prospect of a loss at the general meeting or a takeover offer that is likely to result in losses.
The company at the center of the battle is a former subsidiary of Toshiba, which was forced to place full-page advertisements in US newspapers in the late 1980s to apologize for the sale of submarine technology to the Soviet Union.
The conflict started in late January when a group of funds backed by Mr. Murakami launched a hostile takeover to acquire up to 43.8 percent of Toshiba Machine.
Mr. Murakami and his daughter, who have urged the company to increase the low return on equity, are behind a complex network of funds that together have built a 12.7 percent stake in Toshiba Machine.
To block its efforts to increase its stake, Toshiba Machine threatened to take immediate action against acquisitions, including issuing warrants that would dilute the shares held by Mr. Murakami’s funds. The proposed steps will be subject to a shareholder vote on Friday.
Toshiba Machine – which also manufactures devices that can be used for missile technology – has also contacted Japanese regulators. The Tokyo-based city index Eleventh, which submitted the takeover offer, should be viewed as a foreign investor since Singapore-based Murakami actually made investment decisions for this fund.
“The takeover offer will be made with no clarity as to the true identity of the fund,” said Shigetomo Sakamoto, newly appointed President of Toshiba Machine, in an interview.
Toshiba Machine claims that Mr. Murakami and his funds have violated existing foreign exchange and foreign trade law regulations that require foreigners to report their holdings in potentially sensitive sectors to the authorities before they reach 10 percent.
Office Support, the company owned by the Cityindex, said the funds were managed independently. The offer for Toshiba Machine does not violate the Fefta rules, since only the direct subsidiary of a non-Japanese company and a secondary subsidiary would be classified as a foreign investor. City Index would therefore be called a domestic investor.
The MoF declined to comment, but government officials said the ministry had looked into the matter.
The new Fefta regulations, which are due to come into force in May, will broaden the definition of a foreign investor to cover several levels of subsidiaries – such as Cityindex – that are indirectly owned by a foreign parent fund.
However, analysts said that while the MoF had more latitude in determining the characteristics of a foreign investor, experienced navigators would probably still be able to find gaps in the updated Fefta. Mr. Murakami, through his daughter, declined to comment on the revised rules.
Mr. Murakami, who was convicted of insider trading in 2007, is a controversial figure in the Japanese investment community. The target group criticized his tactic as a kind of corporate robber and “greenmailer” who wanted short-term results, while supporters say that aggressive activists like him are required to shake up smug Japanese boardrooms.
Toshiba Machine has defended its takeover measures as temporary, but its proposal is controversial since only last year the company abandoned its poison pill measures along with many Japanese colleagues as part of efforts to improve governance standards.
The proxy advisory firm Institutional Shareholder Services supported the company’s proposal, but warned of the poor balance sheet and business development of the management and warned: “Investors whose patience has been used up could vote against the pill and the takeover offer as a referendum on a company’s prospects use successful turnaround. “