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Business

'Foundations' ruffle foreign investors

Founders may be setting up faux charities to sway shareholder votes

Shareholders of DMG Mori head to their annual meeting in Nara Prefecture, western Japan, on March 22.

TOKYO -- A growing number of Japan's listed companies are cozying up to "foundations." These can be set up as charities of sorts that might hand over their dividends to, say, a university. These entities can also be relied upon to hang onto shares -- and to vote however management tells them to.

At any rate, foreign investors have caught a whiff of what might be going on and are starting to put up a stink.

Many companies or founding families set up foundations and allocate shares to them. In Japan, foundations hold big stakes in 176 listed companies.

During its shareholders meeting in Nara Prefecture, western Japan, on March 22, machine tool maker DMG Mori submitted a proposal to allocate what would amount to nearly 3% of the company's shares to a foundation headed by President Masahiko Mori. The purchase price would be 1 yen per share.

U.S. proxy adviser Institutional Shareholder Services objected, calling on institutional and other investors to vote against the proposal.

The measure passed, but barely, winning 67.02% of the votes, slightly more than the minimum required. Many international shareholders went along with ISS.

Kobayashi Pharmaceutical plans to follow suit and propose allocating 1% of its shares to a foundation at its shareholders meeting on March 30. Again, ISS is calling on shareholders to turn down the proposal.

The number of listed companies at which foundations rank among the top 10 shareholders has risen over the past one to two years and is up 19 from the end of March 2012.

Last June, the planned merger of oil distributors Idemitsu Kosan and Showa Shell Sekiyu faced strong opposition from Idemitsu's founding family. The family came to control more than a third of the voting rights by combining its stake with those held by a foundation and a museum. It was this event that sounded the alarm for foreign investors -- beware of "foundations."

Foreign investors see foundations' shareholdings as a problem for two main reasons:

  • When companies sell shares to foundations at extremely low prices, such as 1 yen per share, the shareholder equality principle can be violated.
  • By gaining big stakes in money-making concerns for next to nothing, foundations can be prone to vote however management wants them to vote.

(Nikkei)

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