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Call them well-mannered activist shareholders

TOKYO -- The arrival in Japan of low-profile activist shareholders is part and parcel of ongoing market reforms that just may end up giving a further lift to Japanese stocks.

     These "we're not activist" shareholders might even end up helping the Nikkei Stock Average over the 18,261 mark that it hit July 9, 2007. That was its high point during Prime Minister Shinzo Abe's first term in office.

     Now the new Abe government's growth strategy and ultralow interest rates are providing a tailwind.

     Something else happened on that day back in 2007: The Tokyo High Court labeled U.S. investment fund Steel Partners an "abusive acquirer." The Western fund had launched a hostile takeover bid for Bull-Dog Sauce, a small, though time-honored Worcester sauce maker.

     Perhaps the court's words -- which silenced activist shareholders -- signaled what was to come: a downtrend in Japanese stocks.

     For much of the 2000s, activist shareholders extended their influence in Japan. The so-called Murakami fund, run by Yoshiaki Murakami, asked Japanese companies to improve their capital efficiency. However, their influence has gradually faded since that day of defeat in 2007. Steel Partners had sold most of its stake in Japanese hairpiece maker Aderans by the end of 2014.

     After activist shareholders lost their influence, stock prices remained sluggish for a long period.

     Japan has long denounced foreign activist shareholders as vultures. Their poor-mannered approach toward investment targets and inability to understand companies' businesses opened them up to criticism.

New order

About eight years on, some activist investors have returned. Recently, U.S. hedge fund Third Point acquired a stake in Fanuc and asked the industrial robot maker to buy back its own shares. This became news and a topic of discussion.

     Meanwhile, the actions taken by a Singapore-based hedge fund established by former employees of the Murakami fund are drawing attention. Effissimo Capital Management is the biggest shareholder of Yamada Denki, a big electronics retailer in Japan. ECM Master Fund SPV 1, which the Singapore-based hedge fund manages, intends to raise its stake in Japanese system developer Saison Information Systems from 27.71% to 33% via a takeover bid. Saison Information Systems is listed on the Jasdaq startup market of the Tokyo Stock Exchange.

     The bidder's story, told in documents that Effissimo Capital Management submitted in regard to ECM Master Fund SPV 1, is interesting.

     First of all, these documents say, the fund is simply looking to reap capital gains when the stock price goes up and from dividends. The fund is not interested in exercising its voting rights to gain control of management. The fund has also submitted a letter of commitment to the company's board, saying it will not ask the company to carry out a stock buyback. And, "as far as the fund knows," the company is unlikely to be delisted because the fund will limit its shareholding to 33%.

     The documents further state that the fund's offer is purely for investment purposes. The fund's ceiling of a 33% stake would represent less than one-third of the company's total voting rights. In other words, the fund is winking at management to keep doing what it has been doing.

     You might not guess it from reading over these documents, but the two parties were previously involved in a lawsuit over the fund purchasing additional shares in the company. For this reason, Saison Information Systems remains on its guard.

The modest approach

The more important point is that the fund has purposely noted its intention to comply with the Japan Stewardship Code, a set of rules for institutional investors, when it exercises its voting rights. The code was published by Japan's Financial Services Agency last February as part of the government's growth strategy. The code is meant to force institutional investors to encourage the companies they invest in to improve their capital efficiency.

     Now some shareholders are using a modest tone to encourage companies to do just that.

     After reviewing the advantages and disadvantages of being listed, more companies may restructure their respective groups or conduct management buyouts, said Kenji Shiomura, a senior strategist at Daiwa Securities.

     Japan's Corporate Governance Code takes effect in June. The current draft tells companies to carefully examine the necessity and rationale as well as to provide sufficient explanations to shareholders before invoking anti-takeover measures or when they are involved in cross-shareholding arrangements. The draft also says companies should not take measures that would prevent shareholders from using their rights to sell their shares in response to a tender offer.

     With the code promising to increase the cost of keeping shares listed, many companies may want to consider delisting.

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