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Freshfields Transactions

| 6 minutes read

Shareholder activism in Japan: Part 2 – the changing face of shareholder activism and recent trends

Japan is at a pivotal cultural moment in terms of shareholder activism. In this second part of our blog series, we do a deep dive and chart how the landscape is rapidly changing.

Shareholder activists have historically been seen in a negative light in Japan, likened to "foreign vultures". In the early days of activism in Japan, "outsider" tactics included acquisitions of large shareholdings. Recently, however, activists are progressively viewed as being agents of positive change

The diagram below shows the developing trend and the issues shareholder activists claim they are attempting to address.

Japanese companies have carried out record levels of share buybacks, undervalued companies have been subject to bidding wars, and investors have been emboldened to increasingly vote their shares. Though it would be hard to argue that shareholder primacy now prevails, positive outcomes from high profile activist interventions have reportedly won some hearts and minds.

Tools and tactics used by activists are increasingly in line with, for example, US shareholder activism, often featuring meetings with key stakeholders. In addition, we are seeing more shareholder proposals. 

In the United States, shareholder approvals are precatory and are generally disfavored by shareholder activists. However, the number of proposals that have received shareholder approval has been low over recent years, with the following being the only cases:

  • RISE in 2016.
  • Kuroda Electric in 2017.
  • JP-Holdings and 21LADY in 2018.

No proposals from shareholder activists were approved in 2019.

We have not seen a swing or uptick in proxy fights either and most of the campaigning still appears to be behind closed doors. But, with the rise of activism in Japan, and the increasing openness of shareholders to support activism tactics, it is likely that Japanese companies have been willing to engage in informal, private and undisclosed settlements, agreements, or otherwise make concessions. 

For now, at least, some of the most aggressive tactics, including takeover bids and complex litigation, continue to be uncommon. One theory seeking to explain this phenomenon is that Japanese companies make concessions prior to shareholder meetings that are not subject to disclosure obligations for listed companies. There is no evidence to back this up though as meetings between activists and companies typically take place behind closed doors.

Activism in Japan vs. the rest of the world

Arrival of US activists 

Japanese companies have been traditionally targeted by a small set of activists, but well-known US hedge fund activists have emerged in the shareholder bases of some global Japanese large cap companies. 

Third Point, for example, acquired a 0.06 percent stake in Sony in June 2019. Elliott acquired a 5.51 percent stake in Unizo in August 2019 and around a 3 percent stake in SoftBank in February 2020.

Proxy contests 

Foreign activists have rarely escalated their campaigns to public proposals, with no successful foreign activist campaigns to date. 

Since 2014, there have been 34 public proposals in Japan by Asia-based or domestic activists. In comparison, only six public proposals were submitted by non-Asia based foreign activists. In June 2020, for example, Chicago-based RMB Capital submitted a share buyback proposal to TV Asahi Holdings, Nishikawa Rubber and Musashi In each instance, shareholders voted against RMB Capital’s proposal. 

This does not mean to say that activist campaigns are unsuccessful as their demands may have been met behind closed doors. For example, RMB Capital reportedly asked six other firms to improve shareholder returns and all supposedly raised their dividend or repurchased shares although it is not clear whether this was indeed caused by RMB Capital’s lobbying.

Shareholder base 

In general, the institutional investor base in Japan is less influential than in other global markets. 

As stated above, the shareholder bases of constituents of the TOPIX, one of Japan’s key stock market indices comprising over 2,100 companies, are fundamentally different from key foreign indices. Institutional investors generally have a much lower percentage of common stock than in, say, US-listed companies. Sixty-one percent of the shares of all Russell 3000 companies in the United States are owned by institutions, whereas the figure is only 27 percent for TOPIX. 

In the United States and in Europe, activist strategies have evolved to include reliance on significant levels of institutional investor support from a small absolute number of investors. It is common, for instance, for the largest 10 shareholders of some S&P 500 companies to comprise 30 to 40 percent, or more, of the shareholder base. One significant activist investor and 10 shareholders may comprise a majority of holders. 

In Japan, the dynamic among institutional investors and activists is being shaped by the relative individual influence even the largest shareholders yield.

Balance sheet-related demands 

Japanese companies have historically been more likely to face balance sheet-related demands than US and European peers. The proportion of balance sheet public demands at Japan-headquartered companies since 2013 is 32 percent, whereas the figures for United States and continental Europe are 10 percent and 11 percent respectively. 

The high proportion of such demands in Japan is mostly attributed to the traditionally high cash reserves of many Japanese companies. The fact that these cushions may be helping Japanese companies to better weather the COVID-19 pandemic may well lead to balance sheet-related activism losing popularity. 

Conversely, requests for increased dividends or share buybacks have been deprioritized in recent campaigns, which seems to follow a global trend of activists avoiding being perceived as merely raiding the war chests of cash-rich companies.

Board-related activism 

As activism matures and US activist hedge funds are progressively targeting Japanese companies, there has been an increase in board-related activism. The figure was 21 percent for 2013 through 2018 but increased sharply by 12 percentage points to 33 percent between 2019 and today. 

However, despite this sharp increase, most proposals continue to be unsuccessful or withdrawn. Of the 88 board-related demands that were raised and settled between 2019 to the present, 80 percent have been unsuccessful. 

In what is considered a "landmark" win, shareholders at JASDAQ-listed technology conglomerate Sun Corp voted with Oasis Management to overhaul the board in April of this year. The successful proposal saw the activist install its own three-person slate, including Oasis director Yonatan Domnitz, while ousting four of Sun Corp’s directors. The news was greeted positively by the market with the share price up 9 percent on the week and 47 percent year-to-date.

Other global trends

  • There has been a general global slowdown in activist behavior during COVID-19. However, activists are expected to quickly re-engage when there is an opportunity to do so. As matter of fact, some activists are using the current environment to build toehold investments. This certainly also applies to shareholder activism in Japan.
  • Small/medium cap companies continue to be at risk but are becoming an attractive target as well due to depressed valuations, easy exit options and the ability to leverage relatively small stakes and significant liquidity via connections with institutional investors. In 2019, large caps made up 25 percent of new positions but YTD 2020 that figure is 12.7 percent. Conversely, nano-, small- and micro-caps accounted for 65 percent of new positions YTD 2020 vs 53 percent in 2019. In Japan, small- and mid-cap companies are also increasingly targeted by activists but for different reasons – many of these companies are cash rich and appeal to activists seeking short-term benefits, such as increased dividend payments and share buybacks.
  • In Europe, there is a growing clear divergence between collaborative "operational" vs confrontational "economic" activists. Director candidates for appointments (e.g. ex-CEOs) are being proposed by "operational" activists behind the scenes as a preventative defensive measure for the company.
  • First-time activists continue to emerge with a willingness to engage in brand-building situations – particularly in the United States.
  • Along with environmental, social, and governance (ESG) considerations, US activism continues to have M&A considerations as a core focus with activists becoming more comfortable advocating for immediate M&A solutions.

For those who wish to continue reading, the consolidated version of all four blog posts is available in the below PDF.


corporate governance, asia-pacific