Tokyo inventory change appears to guard small traders as buyouts surge | USAEMALL.com

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Tokyo’s stock exchange is to unveil major new protections for minority investors, as corporate Japan faces surging interest from global private equity firms and a record-breaking wave of management buyouts.

The exchange will use a suite of new rules to address a long-standing complaint from minority investors in Japanese stocks: the lack of transparency around takeover prices and how boards accept or reject offers.

“The big concern we’re trying to address is that companies could end up being sold in a non-transparent or undervalued manner, which would be a big problem for minority shareholders,” said Naotaka Ikeda, senior manager of listings at the Tokyo Stock Exchange, in a Financial Times interview.

“We’re not acting because of any particular case but to make sure we can avoid a big issue in the future . . . we have been dealing with problems on a case-by-case basis but the big expected increase in MBOs made implementing updated rules more of an urgent need,” he added.

The exchange is considering forcing companies to improve disclosures around price by mandating setting up special committees — established to discuss bids — and pushing corporations to reveal details about how and why they make decisions. They will also be encouraged to appoint their own independent financial advisers, explain that choice and disclose any conflicts.

“One thing we are discussing is whether to take a soft law approach and say that companies not taking these actions should explain that decision,” said Ikeda.

The updates are the latest reform push from the bourse and its chief executive Hiromi Yamaji, who is trying to force executives to think about their cost of capital and shareholder engagement. He has taken particular aim at listed companies valued by the market below the net assets on their balance sheet.

Japan’s stock market has long been considered a dangerous place for minority investors, where family shareholders can often exert undue influence, out of kilter with their holdings or voting rights. The country is home to more than 3,500, often undervalued, companies that are listed on the Tokyo Stock Exchange — roughly the same number as in the US, where the economy is significantly larger. 

In a series of court cases in recent months, investors have demanded that the price paid by an acquirer be reassessed. Last year, a court ruled that the fair value of retailer FamilyMart’s shares was significantly higher than the buyout offer from trading house Itochu. Activist investors in Japan’s Taisho Pharmaceuticals are also suing over the price of a management buyout. 

The special committee set up for the takeover battle over Seven & i Holdings, the owner of 7-Eleven, between a tender offer from Canada’s Alimentation Couche-Tard and a buyout proposed by the founding Ito family has been privately criticised by shareholders for a lack of transparency on the details of the offers and an inadequate explanation of their decision-making process.

The draft additions to the rules will be discussed at an expert panel in February, before potentially coming into force after a public consultation. The exchange will also discuss changes to rules around so-called parent-child listings, where a large company controls a listed subsidiary, including ensuring the independence of outside directors.

Bankers and dealmakers in Tokyo think changes to the rules could, in the short term, actually slow down the number of transactions, as special committee members become more cautious in deliberations and decision making. However, long term, they argue that more disclosure can only benefit the market. 

Ikeda acknowledged that one consequence of the reform could be more companies delisting. However, he said the exchange was not concerned about that eventuality because “bigger, more dynamic companies are better for the market”. 

“So, yes, lots of M&A may lead to tender offers and MBOs, but that sort of environment would give more companies growth and benefit the market,” he said.