Huge win for activists as court enjoins Toho HD’s "poison-pill" takeover defence
Takeover defences have experienced a resurgence in the face of rising shareholder activism. This decision is a warning to company management
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For the first time in Japan a Tokyo court has upheld an activist’s request for a (provisional) injunction against the implementation of a takeover defence measure that was approved by a vote of the target company’s shareholders.
This is a major win for 3D Investment Partners over the management of the company in which it has invested – Toho HD. Underperforming management teams in Japan often seek to use takeover defence measures to entrench themselves by preventing economically-minded shareholders from gaining too much voting influence and thus effecting managerial change.
The judgment was delivered by a court of first instance, and the company has stated it will appeal the decision. The decision was also somewhat limited by the particular facts of the case. Despite this, the judgment could be so important for the progress of activism and public to private transactions in Japan, that it is worthwhile discussing in detail.
“Poison pills” that enable companies to dilute an undesirable shareholder that is labelled an “abusive acquiror”, have been utilised in Japan since the early 2000’s. With a key event being the Supreme Court upholding Bulldog Sauce’s takeover defence over the objections of US activist fund manager (at the time) Steel Partners.
Pills fell out of favour in the 2010s, but have experienced a resurgence with the rise in shareholder activism over the last four to five years – with 10 adopted last year alone (per IR Japan).
The basic principle established in judicial decisions is that such defences should only be utilised to prevent damage to the interests of minority shareholders that could arise from a single acquiror building a large stake on market and gaining effective or actual control over a company, without a plan to enhance the value of the company, or with intent to transfer value from minorities to itself. This was a particular issue in Japan, because until this year there was no requirement to make a tender offer to all shareholders upon passing a threshold level of ownership, so long as the stake was acquired on market. However, defences were not allowed to be implemented simply to entrench existing management.
The change to the statutes this year, is that to acquire past the level of a 30% shareholding, the acquiror must make a tender offer to all shareholders. The law remains much more permissive than in other jurisdictions, because the tender offer does not have to be for the entire company – it can be for any amount the acquiror wishes to bid for. That said, the introduction of this change may have been influential on the judge in this case.
The other core principle that has developed, is that takeover defences, including emergency measures implemented outside the normal course of shareholder meetings, must be approved by a vote of the shareholders. Typically, this occurs at the AGM, but for emergency measures (where an acquiror has rapidly built a stake in between AGM’s), the company calls an extraordinary meeting to hold the shareholder vote. This ties in with the basic principle – who is better to assess whether damage to shareholders’ interests is likely than the shareholders?
A nice idea in theory. In practice, however, because of often large cross/allegiant shareholdings which are classed as independent of management despite always voting with management, coupled with relatively low retail shareholder turnout, such votes could be difficult for activists to win. The result of such votes was often not in the best interests of the economic value of the shareholders’ shares! Indeed, in relation to the matter under discussion, 3D lost the AGM vote narrowly, with 54.7% supporting the measure. Toho HD’s register appears to show allegiant shareholders controlling a little under 20% of the voting rights (per Factset).
The court decided in this case, that the takeover defence as proposed, based on the facts of the case, was designed to entrench management, as there was no risk of 3D becoming an abusive acquiror and gaining control. This was the case despite the favourable shareholder vote.
The facts were that 3D owned 20.84% (per Factset) of Toho HD’s outstanding shares (more of the voting rights due to 11.4% of outstanding held by Toho HD as non-voting treasury shares) but told the court (and the company) it did not plan to acquire more than 27% of the voting rights – well below the 30% threshold for making a tender offer to all shareholders. Toho HD’s defence measure would be effected if 3D raised its stake above 24% of the vote (it is typical for management to set the threshold slightly above the current holding).
The court said (machine translated):
"at least in this case, it is not appropriate to conclude that the common interests of shareholders have been harmed by the acquisition of debtor shares by creditors, etc., based solely on a resolution of the shareholders' meeting."
This was based on the reasoning that because the acquiror had promised not to acquire more than 27% of the voting rights, control was not involved. The company needed to show shareholder interests risked actual harm, it was not enough that shareholders approved the defence measures. For similar reasons, the acquisition was not "coercive" in nature
The company claimed 3D's requests and suggestions regarding its management harm the common interests of shareholders: The court said that 3D's proposals were quite:
"ordinary proposals from institutional investors seeking to improve capital efficiency, and cannot be considered to be aimed at pursuing their own interests at the expense of the common interests of shareholders, nor can the other proposals themselves be said to be unreasonable."
While a great result for 3D, it remains to be seen whether the decision will have broader applicability. In particular, the key questions are:
- 3D’s statement that it would not acquire more than 27% of the voting rights was clearly important to the Court, but is 27% now the magic number or will the courts look more at the new 30% (of outstanding, rather than voting) legislative threshold for requiring a tender offer to all shareholders?
- Will the judgment be relevant to non-emergency measures that were in place before the acquiror entered the stock? Typically the implementation trigger threshold for these has been set at 20%, so this would be a huge change.
Depending on the answers to these questions, we could see a flood of similar applications to the court by activists. Recent cases of shareholder votes approving pills that were clearly against the best interest of shareholders include Aska Pharma, Bunka Shutter, and Ain Holdings. All these cases involve very well-funded activists.
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Jamie is the founder & CIO of Senjin Capital, Australia's only fund manager focused on using shareholder activism to unlock the deep value in Japanese publicly-listed small cap companies.
Prior to founding Senjin in 2024, Jamie spent 13 years with Kerr Neilson's Platinum Asset Management, where he became a senior portfolio manager, managing ~$1bn across a global equities and a Japan equities fund, and leading the global consumer and Japan research teams.
Jamie is well into his second decade of investing in Japan, and his history with the country goes back to his high school days. He is still in regular contact with the family who hosted him on his high school exchange.
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Jamie is the founder & CIO of Senjin Capital, Australia's only fund manager focused on using shareholder activism to unlock the deep value in Japanese publicly-listed small cap companies. Prior to founding Senjin in 2024, Jamie spent 13 years...
Expertise
Jamie is the founder & CIO of Senjin Capital, Australia's only fund manager focused on using shareholder activism to unlock the deep value in Japanese publicly-listed small cap companies. Prior to founding Senjin in 2024, Jamie spent 13 years...
Expertise
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