Picture this. It’s late on a bright spring afternoon in Tokyo. The Japanese capital’s famous cherry blossoms are in full bloom. Out of a clear, blue sky, comes a thunderbolt for one publicly traded Japanese firm. A regulatory filing on the Tokyo Stock Exchange (TSE) has just dropped to reveal an activist investor has stealthily accumulated a single-digit stake in the firm.
This is a scene that will play out for dozens of firms across Japan over the next few months in the run up to the AGM (Annual General Meeting) season in June. Activist shareholders are on the prowl in Japan as well as neighboring South Korea. Emboldened by recent campaign victories, replete with bulging war-chests and against a backdrop of falling interest rates, activist funds are stepping up their activities to put pressure on management and boards to raise shareholder returns on investment.
Why Now?
Since the easing of the COVID 19 pandemic, activist funds in several Asian markets, especially Japan and South Korea, have added headcount and opened new offices. During the COVID-induced lull many funds focused on fund raising and on re-balancing and optimizing their portfolios, and now with a replenished war chest they are able to tactically deploy capital into new situations, with speed and at size. And with interest rates coming down, the cost of borrowing is falling which is critical for some activist tactics like pushing for their targets into leveraged buyouts. It’s also worth noting that Private Equity funds are sitting on unprecedented levels of dry powder, estimated by S&P to be in excess of $3.5 trillion, increasing the urgency with which they need to start deploying such capital.
Additionally, moves taken by the regulators and the TSE to reform corporate governance and enhance shareholder returns—like unwinding cross-shareholdings and discouraging poison-pill defenses—have made Japanese firms even more tempting targets for the activists.
Typical Profiles
In Japan, activist investors are known as “monoiu kabunushi” (モノ言う株主). They are typically hedge funds based in low-tax jurisdictions like Hong Kong and Singapore that invest in publicly traded companies. The profile of the companies they target is typically brick-&-mortar businesses in market segments with high barriers to entry but that are also ripe for consolidation. Many are often formerly family-owned businesses, where the founding family still owns a minority stake and has sway over management.
How?
According to data from Diligent Market Intelligence, 103 Japanese publicly traded companies were subject to activist campaigns in 2023. The evidence from Q1 of 2024 is that this number is likely to significantly increase and pick up steam as we move forward towards Japan’s AGM season in June.
Typically, activist funds buy relatively small stakes in public companies of between 1-10%. They put pressure on management through private conversations and public campaigns. Opening salvos include sending open letters to company management teams with suggestions or demands about actions they can take to improve profitability or return capital to shareholders. The goal? To drive the stock price up and ultimately maximize returns on investment for all the investors, including the activists.
Other common tactics include litigation and shareholder proposals for vote at the AGM with proxy contests. Investors that hold at least 1% of the outstanding shares of a Japanese stock for at least six months, can propose items to be voted on at the AGM—a relatively low threshold globally. That threshold is much lower than in the US where the most common proxy access provision gives the ability to a shareholder or a group of up to 20 shareholders who have held 3% of the company's stock for at least 3 years to nominate up to 20% of the board.
There are three typical reactions of Japanese firms targeted by activist investors. They are— fight, flight or “ignore and hope they go away”. For confrontation-averse Japanese management teams, flight and pretend to ignore are far more common responses than fight. But there is another way. Engage and communicate. And if the management and activist investors’ positions are too wide apart to be bridged through negotiation—fight back by launching a more active and outspoken defense campaign.
Most activist investors follow well-established playbooks, with specific areas they tend to focus on when developing their investment theses; they can also be categorized in specific types based on their propensity to work collaboratively and privately with management or being outspoken critics waging public fights. The most sophisticated activist funds have been adapting their tactics to fit specific markets based on corporate culture and social norms. It is possible to identify if your company fits the profile for an activist approach by looking at potential vulnerabilities and the related angles of attacks.
Flight or stonewalling many times are not effective options and can backfire. They may embolden and empower the activists which will criticize the perceived entrenchment of the company and highlight the lack of openness to dialogue with a major shareholder. They can also unsettle your loyal shareholders, employees, customers and business partners. Failure to stand up for yourself and the decisions of your firm will often be perceived as an admission of failure or weakness. Management teams tend to characterize activist campaigns as solely a reputational threat. Farsighted corporate leaders see beyond. They recognize that activist shareholders also present a key opportunity. A catalyst to polish and refine business strategies, tie them to financial results and projections, and ultimately deepen the understanding that your shareholders have of the company’s integrated strategy and financial plan.