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apan

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Activism in Japan

October 24th, 2018

2018

IR Japan, Inc.

Company Defenses vs. Activists are Under Pressure

1

− Regulatory Reform

− Shareholder Rights in Japan

− Institutional Shareholder’s Power vs. Cross-shareholdings

− Voting Transparency and Takeover Defense Policies

− Trend of Independent Directors on Boards in Japan

IR Japan, Inc. 2

2015: The Schedule For Corporate Governance Reform

2015 2016

Jan - Mar Apr - Jun Jul - Sep Oct - Dec Jan - Mar Apr - Jun Jul - Sept Oct -

Revised Companies Act

Tokyo Stock Exchange

Corporate Governance Code

Japan’s Stewardship Code

Japan Revitalization

Strategy

Revised in 2015

JPX-Nikkei 400

Management・Investor Forum

Revision Enacted on June 20,

2014

To be carried out on May 1, 2015

・Disclosure regarding a lack of independence

・Introduction of Audit Committee System

・Reexamine independence requirements

Introduced on June 1, 2015

For companies with March year-ends,

Code-related disclosures required by

December

Finalized on February 26, 2014

As of May 31, 2015

191 firms have adopted the

Stewardship Code, among

which 31 are overseas

firms

Change of Component Companies

Aug 7: Announcement

Aug 31: Reshuffle

August

Components to

be reshuffled

Based on the Japan Revitalization Strategy 2014 Revision, the Forum was established so top

management from companies, domestic and overseas institutional investors, and other businesspeople

at the forefront of the global economy could gather to discuss policies for continuous growth and the

creation of corporate value in the mid-to-long term.

June 2016～End of interim measures

2014/5 2014/8 2014/11

2015/2 2015/5

Signers 127 160 175 184 191

Overseas 12 20 25 28 31

By August – September 2015Create and disclose a policy that specifies to what

extent Boards of Directors can entrust business

decisions to management and explains the range of

duties that can be conducted by truly

independent outside directors.

By December 2016

To ensure the swift provision of information, companies must consider and ultimately

decide on measures to implement electronic disclosure.

By March 2016Reexamine the disclosure rules established in the

Companies Act, the Financial Instruments and

Exchange Law, and securities exchanges, and

consider and adopt a system of integrated disclosure.

Continue to monitor developments in the election of independent outside directors and the reduction of cross-

shareholdings

IR Japan, Inc. 3

The Reformation of Corporate Governance Code in 2018

5 Challenges to the Old Corporate Governance Code

On December 8, 2017, the cabinet decided to revise the Corporate Governance Code to prompt companies to

take on the five challenges below, improve profitability, and revolutionize productivity through promoting

investment.（new economic policy package）

① Management’s decisive decisions in response to changes in the business environment, including

withdrawing/selling business and reviewing business portfolios

② Effective strategic and systematic investments in fixed assets, R&D, and human resources

③ Promote the establishment of an independent nomination/remuneration committee to form structured policies

for CEO appointment/dismissal and development, as well as effective supervision/advisory from the

independent, outside directors to management.

④ Clearly disclose policy regarding the reduction of cross-shareholdings as well as the understanding of

shareholders

⑤ Fulfill roles expected as public pension funds’ asset owners, through the support of the parent corporation.

March 13, 2018: Announcement of RCGC（Financial Services Agency）

IR Japan, Inc.

Rights and Obligations of Japanese Company Shareholders by Percentage Held

% Holding Rights and Obligations of the Japanese Shareholder

More than 1% Right to place items on the agenda (Shareholder Proposals: Company Law Articles 303,304, 305):

Holders of more than 1% of the voting rights or 300 voting units of a company acquire the right to place items on the

agenda to be voted on at the ordinary general meeting. Shareholders must be in their own name on the company

register for six months in advance of the meeting and must claim their right to place an item on the agenda eight weeks

in advance of the meeting.

Right to demand appointment of an auditor of a general meeting (Company Law Article 306)

Holders of more than 1% of the voting rights of a company have the right to demand from a court of law appointment

and selection of an auditor of the conduct of voting and how resolutions are passed at a general meeting of

shareholders.

More than 3% Right to demand a shareholders meeting (Company Law Article 297)

Holders of more than 3% of a company’s voting rights in their own name for a period greater than six months may

demand that management hold a shareholders meeting. The shareholder must communicate to management the object

of the meeting and the purpose of the convocation. If management does not hold the meeting, the shareholder can

hold a meeting if permission is obtained from a court of law.

Right to demand the dismissal of a director or auditor (Company Law Article 854)

Holders of more than 3% of voting rights of a company or 3% of its issued shares in their own name for a period of six

months or greater have the right to appeal in the court of law for the dismissal of a director or auditor in the case that

the director or auditor in question has committed a wrongful act, violated the law or has acted in violation of the

company’s articles AND a resolution to dismiss said director or auditor is rejected.

Right to view the company’s accounts (Company Law Article 433)

Holders of more than 3% of the voting rights of a company or its issued shares in their own name for a period of six

months or greater have the right to view a company’s accounts and related documentation and to demand copies.

More than 5% Shareholders are required to file significant shareholding reports with the Local Finance Bureau

More than 10% Right to demand breakup of the company (Company Law Article 833)

Holders of more than 10% of the voting rights of a company or its issued shares have the right to demand in the court of

law the liquidation of the company.

More than 1/3 Shareholders can prevent the passage of special resolutions.

More than 50% Acquisition of Control= Appointment and dismissal of directors becomes possible

More than 2/3 Passage of special resolutions becomes possible

IR Japan, Inc. 5

Institutional Holdings vs. Cross-shareholdings

※Percentage change from the previous year

5.3%

30.2% (+0.1pt)

7.3%

20.4% (+0.8pt)

20.1%

17.0% (▲0.1pt)12.8%

3.2% (±0.0pt)

30.1%

21.8% (▲0.3pt)

14.9%

3.3% (±0.0pt)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Overseas Trust Banks Individuals Life Insurance Corporate Banks (Commercial & Local)

IR Japan, Inc. 6

Adoption / Elimination of Takeover Defense Plans

Takeover Defense Plans Adopted: 386 (As of the end of June 2018)

28

173

406

570 564543

522 514 511499

480

449 407

386

3 36

11

25

28

25

18

10

24

23

34

45

26

0

10

20

30

40

50

60

0

100

200

300

400

500

600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Total Number Adopted

Number of Eliminated Plans

(Adopted) (Eliminated)

All Listed Companies

IR Japan, Inc.

■ Opposition Vote Percentage Top 10 Ranking

■ Opposition Percentage and Votes Against for the Top 5 Companies

Rank Code Company NameMarket Cap

($1 mil)

Against/Abstain Composition of Shareholders

Latest Prior 2017 Foreign Trust Account※

1 3101 Toyobo Co., Ltd. 1,719 28.35% 48.85% 17.63% 21.40%

2 5631 Japan Steel Works Ltd. 1,333 27.85% 46.16% 25.84% 15.38%

3 9934 Inaba Denki Sangyo Co., Ltd. 1,109 27.46% 46.06% 22.61% 18.01%

4 6479 Minebea Mitsumi Inc. 6,342 32.25% 44.56% 37.46% 17.44%

5 2201 Morinaga & Company Ltd. 2,677 12.71% 41.71% 26.13% 9.14%

6 6472 NTN Corporation 2,950 23.26% 39.24% 19.88% 13.65%

7 1860 Toda Corporation 2,162 32.33% 38.52% 27.49% 5.21%

8 4613 Kansai Paint Co. Ltd. 6,442 33.65% 37.18% 30.14% 10.06%

9 9076 Seino Holdings Co. Ltd. 2,596 34.95% 36.63% 25.74% 14.74%

10 3861 Oji Holdings Corp. 5,285 26.08% 36.63% 23.50% 17.90%

Against Votes vs. Takeover Defense Plans Source: Company Filings

7

※In regards to trust account, top 10 ownership ratio is added

Rank Code Company Name2017

Opposition

Trust Banks Major Asset Management Firms

SMTB MUFG Resona AM OneDaiwa

Asset

Daiwa

SBI

Nikko

Asset

Nomura

AssetSMAM

MUFG

Asset

1 3101 Toyobo 48.85% For Against Against Against Against Against Against Against Against Against

2 5631 Japan Steel Works 46.16% Against Against For Against For Against Against Against Against Against

3 9934 Inaba Denki Sangyo 46.06% Against Against Against Against Against Against Against Against Against Against

4 6479 Minebea Mitsumi 44.56% For For For Against Against Against For Against Against Against

5 2201Morinaga &

Company41.71% For Against For Against Against Against Against Against Against Against

IR Japan, Inc.

Trend in Ratio of Outside Directors (Companies with March FY-End)

*Data is for TSE 1st Section Listed Companies with a March Year End (Source: TSE Corporate Governance Information Service as of July 11, 2017)

a 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

All TSE 1st Section 1,359 1,330 1,326 1,327 1,337 1,390 1,418 1,447 1,450 1,480

Avg. Size of Board 9.3 9.2 9.1 8.9 8.8 8.9 9.3 9.6 9.6 9.5

Avg. No. of Outside Dir. 0.9 1.0 1.0 1.1 1.2 1.4 2.0 2.5 2.6 2.7

Companies with Outside

Directors643 652 694 740 836 1,087 1,390 1,439 1,446 1,478

Companies with No

Outside Directors716 678 632 587 501 303 28 8 4 2

Ratio of Comp. with

Outside Directors47.3% 49.0% 52.3% 55.8% 62.5% 78.2% 98.0% 99.5% 99.7% 99.9%

Companies w/Board of

Auditors1,315 1,294 1,290 1,292 1,302 1,352 1,292 1,143 1,103 1,086

Avg. Size of Board 9.3 9.2 9 8.9 8.8 8.8 9.2 9.4 9.3 9.2

Avg. No. of Outside Dir. 0.8 0.9 0.9 1.0 1.1 1.3 1.9 2.2 2.3 2.4

Companies with Outside

Directors599 616 658 705 801 1,049 1,264 1,135 1,099 1,083

Ratio of Comp. with

Outside Directors45.6% 47.6% 51.0% 54.6% 61.5% 77.6% 97.8% 99.3% 99.6% 99.7%

Companies w/a US-Type

Three Committee Structure44 36 36 35 35 38 43 50 51 47

Avg. Size of Board 9.1 9.3 9.3 9.2 9.4 9.4 9.9 10.1 10.3 10.5

Avg. No. of Outside

Dir.4.3 4.4 4.4 4.4 4.7 4.7 5.0 5.2 5.4 5.6

Companies with Audit and

Supervisory Committee83 254 296 347

Avg. Size of Board 10.7 10.4 10.4 10.4

Avg. No. of Outside Dir. 3.0 3.2 3.2 3.48

TSE 1st Section

IR Japan, Inc.

Establishment of Voluntary Advisory Committee

9

All Listed Companies

152

502

617

730

219

571

697

824

0

200

400

600

800

1000

July 2015 July 2016 July 2017 July 2018

Nomination Committee

Compensation Committee

■Trend in Number of Directors on Committees

■Structure Comparison as of July 2018

Structure No. Outside Directors Majority Outside Directors Entirely Outside Directors

Nomination Committee 22/730 Companies 361/730 Companies 10/730 Companies

Compensation Committee 34/697 Companies 386/697 Companies 15/697 Companies

Committee

Structure

Nomination Committee

2015 2016 2017 2018

Average Size 4.68 4.57 4.59 4.67

Avg. Number of

Outside Directors2.03 2.17 2.30 2.39

Committee

Structure

Compensation Committee

2015 2016 2017 2018

Average Size 4.49 4.49 4.51 4.59

Avg. Number of

Outside Directors1.80 2.09 2.20 2.30

IR Japan, Inc.

Shareholder Proposals and Activism in Japan

10

− Shareholder Proposals since 2003

− Activism in Japan from 2014

− Activist Investors in Japan

− Exit Strategy: Share Buyback

IR Japan, Inc.

Shareholder Proposals in Japan Since 2004

11

13

18

19

17

27

23 2224

22

2825

27

31

37 40

42

59

81

67 64 70

77 75

98

114

149144

152161

167

212 161

0

50

100

150

200

250

0

10

20

30

40

50

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Companies Proposals

Lehman Crisis,

Earthquake and

Tidal Wave

CG Study Groups

2008-2011

Number of Shareholder Proposals and Companies Receiving Proposals

(Companies) (Proposals)

Listed Companies with June Shareholder Meetings

Pre-Activist

Japan

Up to 2005

Foreign

Activists

Enter the

Market

2006-2008

PM Abe

The Three Arrows CG Reform

Osaka vs. Kansai

Effissimo and Loeb

Activism Picks Up

2012-2015

Overseas Activists

Mushroom

2016-2018

IR Japan, Inc.

3 3 3

56

12

3

3

5

3

4

6

7

12

0

5

10

15

20

25

2014 2015 2016 2017 2018

US/European Activists Asian/Oceanian Activists Japanese Activists

12

Activism in Japan – the Trend in Activist Campains

Total : 7

Total : 9

Total : 12

Total : 15

Total : 23

【Trend in Activists’ movements in Japan*】

*Method of Counting Funds by IR Japan

The number of funds listed are those that have used activist strategies either in domestic or overseas markets and have been investing in Japanese stocks.

If a certain fund invested in Japanese companies while it did not adopted activist strategies at that time, this fund is not included in the count for that year.

The data were based on shareholder proposals, publicly released demands, materials released publicly in the media such as letters, campaign sites.

Data Source: IR Japan, Inc. as of October 5, 2018

IR Japan, Inc.

Hong Kong

Oasis（2015）

Argyle Street（2016）

Ascender Capital（2018）

Uruguay

Horizon Capital (2016)

Japan

Reno, Office Support (2014)

Strategic Capital (2014)

Sparx Asset (2017)

M&S LLC (2017)

AlphaLeo (2018)

13

Activism in Japan – Activists from Around the World

【Activist Funds Japan*】

Australia

Morphic Asset (2018)

United States

Dalton Investments (2000s)

Third Point (2013)

Greenlight Capital (2014)

Prospect Capital (2015)

RMB Capital (2016)

Elliott Management (2017)

Volta Global (2018)

ValueAct Capital (2018)

King Street Capital (2018)

United Kingdom

Asset Value Investors

(2017)

Singapore

Effissimo Capital (2000s)

*Regarding the numbers in parenthesis

The numbers show when each fund management firm started its campaign in Japan or when each firm’s investment in particular Japanese stocks became

public via significant shareholding reports or other public information. The names of the fund management firms making their first activist campaign from

2017 are highlighted using bold font

Data Source: IR Japan, Inc. as of October 5, 2018

IR Japan, Inc. 14

Large Activist Shareholdings:

Nissan Shatai / Ontario Teachers Pension Plan (Effissimo Capital)

Maruhachi Warehouse / Prospect Asset Management

TOC / Effissimo Capital

Kuroda Electric / Reno (Murakami Fund)

Sanshin Electronics / C&I Holdings (Murakami Fund)

Toshiba / Effissimo Capital・Third Point・Oasis・Argyle Street, etc.

Campaigns vs Overseas Companies Associated with Japanese Firms

Fujifilm (Associated Company: Xerox) / Carl Icahn

Yahoo! Japan (Parent Company: Altaba) / TCI Fund

Nissin Foods (Invested・Business Partner: Premier Food) / Oasis Management

Exit Strategies via Share Buyback (LBOs, TOBs and Appraisal Rights)