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Shareholder activists are conducting campaigns against a record number of Japanese companies, saying they have more than enough cash to weather the coronavirus pandemic and boost shareholder returns.

Activist investors have submitted proposals to the annual general meetings of 23 listed firms this year as of June 22, according to data from IR Japan Holdings Ltd. That already surpasses the all-time high of 16 the year before.

Money managers including Oasis Management Co., RMB Capital and Asset Value Investors Ltd. are urging companies to buy back shares, arguing they can easily do so despite the impact of the pandemic. It’s a country where return on equity for companies in the benchmark Topix index is less than half the level for those in the S&P 500 Index in the U.S.

“It’s a problem for shareholders to use the virus as an excuse not to seek better returns,” said Masakazu Hosomizu, a partner and portfolio manager at RMB Capital. “Japanese companies still have a lot of room to improve from a global perspective.”

Prime Minister Shinzo Abe’s administration has overhauled Japan’s corporate-governance rules, seeking to encourage investors to press companies to improve profitability and capital efficiency. This has emboldened activist investors to increasingly target Japanese firms at this year’s AGMs, which peak in June.

Hong Kong-based Oasis submitted shareholder proposals for buybacks at the builder Hazama Ando Corp. and the warehousing and distribution company Mitsubishi Logistics Corp. It also called on elevator-maker Fujitec Co. to cancel all its treasury shares.

‘Modest proposals’

Seth Fischer, the founder and chief investment officer of Oasis, said the hedge fund made “deliberately modest proposals” this year. For example, on Hazama Ando, he said he only asked for a repurchase of ¥17 billion ($159 million), which compares with the company’s plan to invest ¥100 billion in what Oasis calls low-return, high-risk businesses.

Oasis is only targeting companies that “can dramatically improve their governance,” Fischer said. While Japan has made “a lot of progress,” there is still “a lot more progress to be made,” he said.

Chicago-based RMB Capital submitted share-buyback proposals to three companies — TV Asahi Holdings Corp., Nishikawa Rubber Co. and Musashi Co. It asked six other firms to improve shareholder returns, all of which raised their dividend or repurchased shares, according to Hosomizu. Asset Value Investors, which is based in the U.K., submitted a proposal seeking a buyback at one company, Teikoku Sen-I Co.

“The three companies we’ve made share buyback proposals to are all firms that have excess capital,” RMB’s Hosomizu said.

Dalton letters

When stock markets plunged in March, Dalton Investments wrote to more than 30 Japanese companies asking them to buy back shares, according to co-founder Jamie Rosenwald. A buyback would indicate confidence in the future and take advantage of the cheap levels caused by “panic selling,” the $3.2 billion U.S. money manager said. More than a third of the firms responded by doing repurchases, according to Rosenwald.

“Dalton has not slowed down its corporate engagement activities since the outbreak of COVID-19,” Rosenwald said. “Dalton has quietly engaged managements to slowly increase dividends and conduct share buybacks where we feel that they are appropriate.”

Some activists have refrained from calling for buybacks because of the coronavirus. An example is Fir Tree Partners, which has been urging Kyushu Railway Co. — known as JR Kyushu — to boost returns. Fir Tree made shareholder proposals this year to nominate directors and for the company to disclose real estate assets, but it didn’t ask for a share repurchase.

“Recognizing the challenging economic environment, Fir Tree acknowledges that now is not the appropriate time for a share buyback,” the investor said in a statement in May. “However, now more than ever, it is imperative JR Kyushu have the right board members and investor disclosures in place to appropriately address the challenges facing the company.”

So far, the activists have had limited success with shareholder proposals. Oasis successfully replaced directors at Sun Corp. earlier this year, but Fir Tree failed in its proposals at JR Kyushu, as did Oasis at Fujitec and AVI at Teikoku Sen-I.

Nervousness returns

IR Japan, which helps companies defend themselves against activists, said some people had hoped the virus would slow the investors down in Japan.

“There was some optimism that activity from activist shareholders would be dented,” said Atsuko Furuta, a director at the firm. “But proposals from activists kept coming in May and June and a sense of nervousness has returned,” she said.

It’s “very difficult” for companies to figure out how to run their business during the coronavirus while also dealing with activists, she said.

For Kengo Nishiyama, a senior analyst at Nomura Institute of Capital Markets Research, the virus is hurting firms, and some investors will take this into account when evaluating activists’ demands.

“We can’t say that the coronavirus outbreak won’t have an impact on companies’ cash flow,” he said. “In fact, domestic institutional investors, at least, wouldn’t agree with proposals that seem to drain large amounts of cash out of companies in the short term.”

Loosening standards

Other market participants are loosening their voting standards to give companies more freedom this year because of the virus. Institutional Shareholder Services, the influential proxy adviser, said in May it would temporarily relax a voting criterion for firms to have return on equity of at least 5 percent. Sumitomo Mitsui DS Asset Management Co., a Tokyo-based money manager, said it won’t apply numerical standards for ROE, dividends or earnings.

But activists say their requests are far from asking too much — and have taken the pandemic into account.

“Japan has the strongest balance sheets globally,” Oasis’s Fischer said. “The devil’s in the details.”

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