Japan’s trade ministry colluded with Toshiba Corp’s (6502.T) management to unduly influence a key shareholder vote last year, an independent probe found, undermining Tokyo’s efforts to improve corporate governance and win over foreign investors.
The investigators’ report released on Thursday marks an explosive turn in a long-running battle between the Japanese company’s management and foreign shareholders, which include activist investors and Harvard University’s endowment fund.
It alleges the Ministry of Economy, Trade and Industry (METI) leaned on the Harvard fund and other foreign investors in an attempt to get them to vote along with management at last year’s annual shareholders meeting.
The allegations of METI’s intervention – previously reported by Reuters – are likely to raise doubts about how committed Japan is to becoming more open to foreign capital – a goal set by former Prime Minister Shinzo Abe. The report also raises questions about who in government was aware of METI’s role.
“Toshiba requested METI’s support for the so-called measures to counter the activists” at the annual general meeting, the report, written by independent investigators, found. Toshiba’s management “worked closely” with the ministry to exert “undue influence on some shareholders,” the report found.
Contacted by Reuters, METI said it was aware of the report and was looking into its contents.
Toshiba said it would “carefully review” the report and comment at a later date.
In one telling episode from the report, the ministry was said to have contacted one foreign fund to warn it against “barbecuing next to your neighbour when there is a big fire,” in an apparent suggestion the fund should refrain from backing proposals by top shareholder Effissimo Capital Management, a Singapore-based fund, the report said.
Effissimo had nominated three candidates, including its own co-founder, as directors to Toshiba’s board. Ultimately none were elected.
Toshiba was found “to have devised a plan to effectively prevent shareholders from exercising their shareholder proposal right and voting rights,” by putting undue influence on Effissimo, the Harvard fund and another fund, 3D Investment Partners.
The report also said that some of the actions raised “suspicions of violations of laws and regulations in many places”. Investigators later told a news conference that the violations may involve confidentiality requirements for bureaucrats.
A spokesperson for the Harvard fund declined to comment. Representatives for Effissimo and Singapore-based 3D did not immediately respond to requests for comment.
“The conclusions and facts in this report are very disturbing,” said Nicholas Benes, head of the non-profit Board Director Training Institute of Japan.
“The report raises a hornet’s nest of questions. Will an (extraordinary general meeting) be called to elect the board again? Will directors or others be sued? Could Toshiba even be delisted?”
Once a crown jewel of corporate Japan, Toshiba was battered by accounting scandals that stretch back to 2015 and massive writedowns for its U.S. nuclear business as well as the sale of its semiconductor unit, leaving it a shadow of its former self.
But as one of the few domestic manufacturers of nuclear reactors which also makes defence equipment it remains important to the government.
Following a 2017 capital raising, a number of foreign funds invested in Toshiba, making an uneasy marriage of activist investors and a key strategic asset.
It was not immediately clear whether the highest levels of government were involved. The report said that Toshiba’s then president met with Yoshihide Suga, who was chief cabinet secretary under Abe, to explain the situation in May 2020.
Suga, now prime minister, on Thursday said he was “absolutely not aware” when asked if the allegations in the report were true.
The probe, conducted by three lawyers, found that Toshiba, with the ministry, tried to force Effissimo to withdraw shareholder proposals for board nominees aimed at improving governance.
Reuters previously reported Harvard’s endowment fund had been told by a Japanese government adviser it could be subject to a regulatory probe if the fund did not follow management’s recommendations at the AGM last July.
The Harvard fund ultimately abstained from voting. The ministry has previously said it never asked the adviser to contact Toshiba shareholders.
Thursday’s revelations come after Effissimo and other activist investors in March successfully pushed for an investigation – itself a landmark victory for shareholder activism in Japan. read more
Since then, Toshiba has seen former CEO Nobuaki Kurumatani resign and the ensuing turmoil lead to a $20 billion bid for the conglomerate from CVC Capital.
CVC’s offer to take the Japanese conglomerate private and retain incumbent management was perceived by some in the company as designed to shield Kurumatani from activist shareholders, Toshiba sources have said.
While Toshiba has dismissed that bid, it has announced it will conduct a strategic review.
Activist investors are estimated to account for about 25% of Toshiba’s shareholder base – an unusually large proportion after the company, on the verge of collapse, had to quickly issue some $5.5 billion worth of shares in 2017.
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