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Company: Toyo Suisan Kaisha (2875.T)
Business: Toyo Suisan Kaisha and its subsidiaries produce and sell food products in Japan and internationally. The company operates through the following segments: Seafood, Overseas Instant Noodles, Domestic Instant Noodles, Frozen and Refrigerated Foods, Processed Foods and Cold Storage. It purchases, processes, and sells seafood, and manufactures and sells a variety of products including instant cup and bag noodles, soup and processed foods.
Stock Market Value: Roughly 1 trillion Japanese yen (10,070.00 yen per share)
Activist: Nihon Global Growth Partners Management
What’s happening
In late April, Nihon Global issued a press release and presentation detailing its investment in Toyo Suisan and four shareholder proposals it has put forward to be voted on at the company’s upcoming 2024 general shareholders’ meeting: (i) increase the dividend payout ratio to 40%; (ii) repurchase 20 billion yen of the company’s shares; (iii) implement a director stock compensation program; and (iv) disclose the company’s cost of capital.
Behind the scenes
A word about shareholder proposals in Japan for those who are not familiar with them: They are like going before Judge Chamberlain Haller in the 1992 movie “My Cousin Vinny.” “That is a lucid, intelligent, well thought out objection. Overruled.” In other words, they rarely pass. Last year, 3% of corporate governance shareholder proposals were passed and 4% of balance sheet-based shareholder proposals were passed. That is part of an upward trend. But there is a lot of good news here. First, if passed they are binding – unlike in the U.S. Second, and more importantly, they do not need to pass to get the attention of management. Japanese business culture takes shareholder concerns seriously: If a proposal gets at least 20% of the votes, management will often act in some way that is consistent with it. Last year, 107 shareholder proposals received more than 20% approval from shareholders, and 49 received more than 30%, according to a study by law firm White & Case.
In this case, Nihon Global could potentially win here or receive upward of 40% of the vote, which is almost like a mandate in Japan. Last year at Toyo Suisan, a less experienced activist shareholder with negligible ownership who did not do any marketing or soliciting to support its more debatable proposal to amend the Articles of Incorporation received 19.8% of the vote. Moreover, the shareholder base here is 41% foreign and more likely to support a shareholder proposal. There is no “white knight” large shareholder and no cross holdings that support management. Nihon Global’s first three proposals are more likely to pass than its fourth proposal, as the first three require a majority of votes cast and the fourth proposal would require two-thirds of the votes cast. One last possibility that often happens in Japan is that Nihon Global could withdraw its proposals after meeting with management, who would agree to institute some of the recommendations. Senior management has thus far refused to meet with Nihon Global, but the firm has only been requesting a meeting since September 2023 and that is somewhat standard in Japan. Now that Nihon Global has escalated it to shareholder proposals, senior management may decide to meet with the firm, particularly as this is a next-generation senior management team, some of whom are American trained.
This activist campaign highlights three important themes in Japanese activist investing. First, it shows the opportunities available to activists in Japan where reasonable shareholder proposals could lead to significant shareholder value creation. Second, it shows the limitations of activism in Japan where ambitious plans, even if compelling and logical, such as divesting non-core businesses and focusing on the core business is a non-starter in the early stages of a campaign in Japan. Third, there is a trend in Asia of private equity investors turning to public company shareholder activism. While shareholder engagement in Japan is relatively new for public investors, private equity investors have been doing it for decades. Accordingly, it is the private equity investors who have the experience dealing with management teams of public Japanese companies. That is inviting a lot of former private equity investors into the space. Brian Doyle of Nihon Global and his team are a good example of this. Hiroyuki Otsuka, a former deputy head of Carlyle Group’s Japan business, recently raised approximately $1 billion dollars to launch Newton Investment Management, a Japanese engagement fund.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.