It’s a defining moment in a 146-year history: An icon of corporate Japan locked in a battle with hedge funds and activist investors that will come to a head at a key shareholder vote this week.
On one side, Toshiba Corp.’s management, and — at least at some points in its recent history — the government of Japan.
On the other, some well-known names in the investing world. Effissimo Capital Management Pte. and 3D Investment Partners Pte. in Singapore, Farallon Capital Management out of San Francisco and Oasis Management Co. in Hong Kong.
At issue in Thursday’s meeting is whether the conglomerate should split into two companies, as management is proposing and the funds are opposing. Toshiba, some of them argue, should sell itself to private equity, presumably giving them a faster return.
Some argue it’s a test case for how Japan Inc. functions alongside shareholder capitalists in the country’s $6 trillion (¥719 trillion) stock market. Others say it’s too unique to matter beyond itself. Few would dispute that the long-running saga is a mess.
"This situation is a litmus test of governance processes in Japan,” said Rezo Kanovich, a fund manager at Artisan Partners, a large U.S. owner of Toshiba’s stock.
Management at Toshiba and the government have been accused of colluding to sway an important voting decision as they sought to prevent an erosion of control at the company, which as a nuclear power provider is considered important to national security. The funds, on the other hand, subjected to years of mismanagement and scandals, say it’s time for a clean slate.
Shareholders will vote on two proposals: one, from Toshiba, asks them to support the two-way split; a competing one, put forward by 3D, calls for the company to reconsider alternative options, including a sale.
Rarely has there been such widespread and open opposition to a company’s plan.
Effissimo, the largest shareholder with a roughly 10% stake, spoke out against it this month, saying a spinoff would be irreversible and could be detrimental in the longer term. For Farallon, privatization is the best solution and Toshiba should solicit proposals from private equity.
Two major proxy advisers, Institutional Shareholder Services Inc. and Glass Lewis & Co., both say clients should vote against Toshiba's proposal. Glass Lewis argues the process that led to it relied on "flagrantly dubious reasoning” and sidestepped investor feedback and private equity buyout interest. (ISS is against 3D’s proposal, while Glass Lewis is in favor.)
But despite the backlash, Toshiba is pushing ahead.
The company is structuring Thursday’s vote on its proposal as advisory and not legally binding. It will only need a simple majority to pass. The binding vote, which would usually require a supermajority, won’t take place until next year. Shareholders have been fiercely critical of the arrangement.
Management, activists and the government are "all stubbornly trying to push through their agenda without taking feedback or ‘reading the room,’” said Mio Kato, an analyst at LightStream Research in Tokyo. "Ironic, because that is precisely what got Toshiba in trouble in the first place.”
A spokesperson for Toshiba said the company will continue to make every effort to explain the situation to shareholders so that they support its proposal. The Ministry of Economy, Trade and Industry declined to comment. Effissimo, Farallon and Oasis declined to comment, while 3D didn’t respond to a request for comment.
Once one of Japan’s most revered companies, Toshiba has lurched from one disaster to another over the past seven years.
It started with an accounting scandal in 2015 that devastated its profits and led to a company-wide restructuring. The subsequent unraveling of a costly foray into nuclear power business in the U.S. led to a $6.3 billion (¥756 billion) writedown and saw it teeter on the edge of delisting. It was forced to sell its crown jewel memory-chip unit and offer stock that was snapped up by activist investors, giving them an outsized presence on the shareholder register.
When Effissimo sought in 2020 to put one of its co-founders and other candidates on Toshiba’s board, shareholders rejected it. Suspicious about how the vote was conducted, Effissimo proposed that independent investigators be appointed to look into it, winning a landmark shareholder vote last year. The subsequent report by the investigators alleged that Toshiba management worked hand in hand with government allies to sway the outcome, findings that four Toshiba board members described as "deeply disturbing.”
Then last year, CVC Capital Partners made a surprise buyout offer, which turned into another controversy, partly because of concerns that Toshiba’s then chief executive officer had a conflict of interest because he previously worked for CVC. The deal would later stall. Paul Singer’s hedge fund, Elliott Management Corp., became a "significant investor” in Toshiba after the offer.
"Major holders have lost trust in the board,” said Nicholas Benes, who heads the Board Director Training Institute of Japan. "Shareholders are afraid that problems arising from old allegiances, slow restructuring, and opaque governance will just be replicated while value drains away.”
Toshiba rejigged its leadership this month, with Taro Shimada becoming chief executive officer in a move the company said was designed to prepare for the two-way split.
But shareholders are still calling for better management. Effissimo says a "trustworthy” leadership team should be put in place. Artisan, which opposes privatization and argues that all public shareholders should be able to benefit from the "undervalued” company’s recovery, echoes the sentiment.
"The old ways no longer work,” Kanovich said. "Companies need credible, experienced and functional boards that can formulate strategy and effectively communicate. The outcome of this situation will determine whether many other Japanese companies become similarly vulnerable.”
The lack of trust at Toshiba goes both ways, according to LightStream’s Kato.
"Activists believe a privatization is clearly the right thing to do and are not listening to arguments to the contrary and unwilling to accept that the government likely will not allow that to happen,” he said. "That gap in understanding is the source of mistrust in my view as Toshiba management and the board can’t just come out and say they won’t privatize.”
In an interview last month, the now former Toshiba CEO Satoshi Tsunakawa said privatization has several risks that are impossible to ignore, including that the company would lose orders from public entities if a sale went through and would be forced sell sensitive technology operations in areas such as nuclear, defense and cybersecurity. By contrast, Toshiba independent director Raymond Zage said last week he’d vote in favor of 3D’s proposal to reconsider options including a sale.
"Toshiba and the activists are working off two completely different goals,” said Seki Obata, an associate professor at Keio Business School. The latter are more interested in cashing out, he said.
For one longtime investor in Tokyo-listed firms, the likely interest of government is one reason to steer clear of Toshiba. The government lists Toshiba, with its expertise in nuclear power, as a company of interest to national security under the Foreign Exchange and Foreign Trade Act.
"We have avoided investing in Japanese companies which we believe are ‘near and dear’ to the government and Japan Inc.,” said Jamie Rosenwald, a co-founder and partner at Dalton Investments, which oversees $3.2 billion and isn’t involved in Toshiba. "Japan continues to move 1.5 steps ahead and 1.0 steps back as regards corporate governance. While improvements are generally being made, shareholders remain frustrated.”
Of those that do hold shares, few are predicting how Thursday’s vote will go. Multiple permutations are possible due to the two proposals. In recent months, shares have generally risen on developments that make privatization more likely.
Seth Fischer, chief investment officer of Oasis, was willing to prognosticate. Toshiba’s proposal is unlikely to pass at the current share price, he told CNBC this month, and if it doesn’t, that will trigger a formal process to privatize.
Whether that proves right remains to be seen, but for Nga Pham, a research fellow at Monash Center for Financial Studies in Melbourne, one outcome is inevitable: the long-term ending for this company will be "overdue” restructuring.
"Toshiba is the gift that keeps on giving,” said Jesper Koll, expert director of Monex Group Inc. in Tokyo. "Every six months, there is a new turn in the saga.”