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Business trends

Activist funds jump 50% to hit record levels in Japan

Reforms open way for new battle against opaque corporate governance

Like much of Asia, Tokyo has become fertile ground for activist funds thanks to increased corporate transparency.

TOKYO -- Activist funds have hit record levels in Japan, jumping more than 50% since 2017, a sign that government efforts to shake up the country's famously opaque corporate governance are beginning to take effect.

IR Japan, one of the country's leading investor relations consultancies, had identified 25 activist funds investing in Japanese stocks as of October this year, up by nine from 2017 and from a total of eight in 2014. Funds agitating for change at Japanese companies include global names such as Oasis Management, Third Point, Elliott Management and Argyle Street.

Along with activist funds, the number of shareholder proposals is also at record levels. IR Japan's data shows that during June's annual general meeting season, 42 companies received shareholder proposals, the highest level ever recorded. Shirou Terashita, chief executive of IR Japan Holdings, said that "the number will most likely increase again next year."

Asia is increasingly fertile ground for activists, according to consultancy Activist Insight. In the first six months of 2018, the number of companies targeted increased by 25% compared to the first half of 2017.

Activists -- defined as those with a history of campaigning for change through proposals to boards -- have been particularly noticeable in Japan after the introduction last year of guidelines that ask shareholders to disclose their votes on proxy proposals.

In June, Japan's Corporate Governance Code was revised to urge companies to disclose policies on reducing cross-shareholdings as well as to enhance board structure and consider the cost of capital in business plans. The reforms have been prompted by a number of scandals at once untouchable Japanese companies such as Olympus and Toshiba.

These changes have opened a window of opportunity for activists seeking to exploit low valuations of under-managed companies in Japan's rapidly changing market. Investors now have to explain why they back incumbent boards in the event of a proxy fight. However activists are also under pressure to present more rational proposals, says Terashita.

One of the more active funds in Japan, Hong Kong-based Oasis Management, is gearing up for a new battle with the board at internet and cryptocurrency company GMO Internet.

At the company's annual meeting in March, Oasis lost its bid to force the group to shed its poison pill takeover defenses, despite the fact that shareholders accounting for 45% of the company -- including Nomura Asset, Sumitomo Mitsui Trust Bank and Daiwa Asset Management -- supported the fund's proposals.

GMO chief executive Masatoshi Kumagai, who controls 40% of the group's shares, "unfortunately treats the company like an entitled rock star," Oasis Chief Operating Officer Phillip Meyer told the Nikkei Asian Review. Not counting Kumagai's shares, company data shows that investors holding nearly 90% of the balance had agreed to the proposal. Oasis would "probably make similar proposals at the next general meeting and maybe we will get more support," he added.

Oasis appears to be at the forefront of the activist movement in Japan with three proxy fights recorded in the first six months of 2018, according to Activist Insight. Its most recent fight is against the agreed all-share buyout of Alpine Electronics by its 40 per cent shareholder Alps Electric. Oasis says the value agreed is too low.

Others are also increasing their presence in Japan. Argyle Street Management, another Hong Kong-based fund, has urged Japan's biggest listed life insurer, Dai-ichi Life Holdings, to sell its cross-holding shares and buy back up to $13 billion worth of its own shares, as reported by Wall Street Journal. Dai-ichi declined to comment, and Argyle has yet to respond.

U.S.-based investment fund King Street Capital Management, which owns 6% of Toshiba`s shares, revealed in October that it had been lobbying for a share buyback at the industrial conglomerate. Toshiba shares rose sharply in June when it unveiled plans for a 700 billion yen ($6.18 billion) share buyback.

Experts believe the growing presence of activists is already influencing Japanese companies to take proactive steps to avoid finding troublesome shareholders on their registers; others have been slow to act.

"The disparity between companies is getting bigger," said Yuji Kuramoto, head of stewardship at Daiwa SB Investments. "There are more companies trying to improve governance, but I also see old-fashioned companies who refuse to change."

Current market volatility could be a huge opportunity for activists, experts say. The recent tumble in stock markets prompted by concerns over souring U.S.-China relations could offer activists the opportunity to buy shares on the cheap.

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