October of last year, The Children’s Investment Fund Management UK LLP (TCI), a hedge-fund managed by Christopher Cooper-Hohn, sold all of its shares in Electric Power Development Co. (J-Power), Japan’s largest wholesaler of electricity. According to Bloomberg, the sale was the culmination of a three year battle between the two companies and resulted in a loss of about $130 million for TCI. The incident is representative of Japanese companies’ tendencies to resist foreign shareholder activists in publicly traded companies. The battle began in November of 2005 when John Ho, Director of Asia-Pacific investments for TCI approached J-Power about investing in the company with the hope that J-Power’s cash flow would allow it to double its dividends. A year later, TCI owned a 5% stake in J-Power and almost 9% at the end of 2006. Although Masayoshi Kitamura, vice president of J-Power, commented that his company was open to foreign investors, the company could not work with a shareholder activist that made demands which Kitamura stated was in opposition to the company’s strategy. Those demands included raising annual dividends, limiting cross-shareholdings to a maximum of 5 billion yen (about $53 million) and hiring at least 3 outside directors. In the 2008 annual general meeting, J-Power shareholders rejected TCI’s proposals and TCI sold its shares back to J-Power.
TCI is just one of many Western investors to encounter this resistance to shareholder activism in Japan. The atmosphere in publicly traded Japanese companies differs from the shareholder focus common in Western companies. “Stable shareholders” or passive, local investors such as financial institutions that are in for the long-haul account for 30% of Japan’s equities market. The court system in Japan often supports poison pill moves and the tradition of holding all annual general meetings on the same day or in a concentrated time period makes it difficult for activists, especially foreign activists, to have any significant influence in Japanese companies. Additionally, Japanese companies have no equivalent to Sarbanes-Oxley, which requires companies to have a majority of independent members on the Board of Directors, thus many Japanese board members tend to be company executives. Although the Ministry of Economy, Trade and Industry recommended in June, 2009 that companies have at least one independent board member or auditor or prepare a report detailing the company’s steps to increase accountability, the measures fall short of what foreign investors would like to see.
According to the Bloomberg article, Shuhei Abe, president and founder of hedge fund manager Sparx Group Co., believes that Japanese management will eventually be more activists-friendly if that’s the price for reviving their economy.
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