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Toshiba activist investor Effissimo wins battle over management

Shareholder vote launches investigation into management conduct

A majority of Toshiba shareholders voted for an independent probe of alleged voting irregularities in the reappointment of CEO Nobuaki Kurumatani. (Source photos by Tokuyuki Matsubuchi and AP)

TOKYO -- A majority of Toshiba's shareholders voted on Thursday for an independent investigation into alleged voting irregularities at the company's annual general meeting last year, in a victory for activist investors over the Japanese group's management.

Effissimo Capital Management, which holds 9.9% of Toshiba shares, called for the investigation to look into whether management exerted influence on shareholders during last July's meeting to vote in favor of reappointing CEO and President Nobuaki Kurumatani, or to abstain from voting.

The Thursday vote, held during an extraordinary general meeting, means that three lawyers will investigate last year's meeting. They will also look into why 1,139 votes received a day before the AGM were improperly voided.

Toshiba's stock price ended Thursday up 1.47% after jumping 3.34% in morning trade on news of Effissimo's victory.

"We continue to believe that reforming Toshiba's compliance and corporate governance functions are critical to improving the company's corporate value," Effissimo said in a statement issued after the meeting. "Toshiba's directors and executive officers now have a legal obligation to comply with this decision by Toshiba's shareholders and cooperate with the investigation."

Unseating Kurumatani was not the goal of proposing an investigation, a spokesperson for Effissimo told Nikkei Asia.

A second proposal by Farallon Capital Management, a 5% shareholder, was defeated. Farallon needed a supermajority of shareholders to amend the company's articles of incorporation to require shareholder approval of Toshiba's investment strategy.

Foreign investors such as Singapore-based Effissimo and Farallon, founded in California by activist hedge fund manager Tom Steyer, have amassed shares in big, cash-rich Japanese companies like Toshiba in the past decade. An accounting scandal in 2015 led to corporate structure reform and an issuance of new shares by Toshiba, ushering in overseas investors who now represent 62% of shareholders.

The extraordinary general meeting was a test for Japan's corporate governance code, which was revised in 2018 to emphasize sustainable growth and investor value. The proposals also had implications for foreign investors, who have grown in number but not in influence at Japan's cosseted national champions.

Effissimo alleges that the company's management placed "undue pressure" on shareholders to vote in Kurumatani's favor, or not to vote at all, on his reappointment. Kurumatani narrowly survived the vote, with only 57.2% of shareholders backing him at the company's annual general meeting last summer.

Toshiba management portrayed the proposed investigation as redundant, pointing to an audit committee's findings that vote administrator Sumitomo Mitsui Trust Bank and Japan Post were responsible for delayed and uncounted votes.

Effissimo's proposal won backing from other major foreign investors, including the world's largest sovereign wealth fund, Norges Bank Investment Management of Norway, and the largest U.S. public pension fund, the California Public Employees' Retirement System.

"Toshiba sincerely accepts the shareholders' holistic opinion. We will sincerely cooperate in the investigation ... and will strive to ensure further transparency in our operation," the company said in a statement. An official count of shareholder votes is not expected until next week, after an audit.

Convening an extraordinary general meeting is a rare move for Japanese companies. Acquiescing to shareholder demands for a special gathering was preferable to a court-ordered EGM, corporate lawyers told Nikkei Asia, although it opened the door for a referendum on Toshiba's corporate structure.

Thursday's outcome calls into question not only the embattled Kurumatani's leadership, but also the validity of Toshiba's current board of directors, who were elected by shareholders at the annual meeting now under investigation.

"A majority of the board are outside directors. Were they misled by Kurumatani?" said Shin Ushijima, a corporate lawyer and director of the Japan Corporate Governance Network. "No one knows yet, but this is a big warning to the entire Japanese business community."

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