9/23/2025
Opinion: Activists Ride to Rescue Minority Shareholders Hit by Japan's Buyout Surge
Nikkei Asia (09/23/25) Halse, Jamie
Jamie Halse, the founder and managing director of Senjin Capital, Australia's first Japan-focused activist fund manager, notes in this commentary that a surge in M&A activity is driving Japan's stock indices to new highs. Within this trend, management buyouts (MBOs) and other insider-led deals have drawn particular scrutiny, sparking controversy among investors and regulators. MBOs are increasing to record levels for three key reasons, according to Halse. First, the nation's corporate governance reform and increasingly engaged shareholders are making life less comfortable for managers of underperforming listed companies. Second, the stigma associated with a management team or major shareholder choosing to delist its company is dissipating. Third, the economics of such transactions for the insiders are phenomenal. "There is an inherent conflict with shareholder interests where a management team agrees a buyout deal in which it stands to participate in the post-deal economics," says Halse. "The financial incentive is to push the deal through while offering as small a premium as possible. Theoretically, shareholders should refuse to tender their shares into an unsatisfactory deal. Theory breaks down, however, when investors are faced with a precipitous drop in the trading price once the deal premium disappears." Halse points out that this conflict of interest exists in every market, but in ones like the U.S., the U.K., and Australia, the courts have ruled that directors owe a duty to shareholders to pursue the best deal price. If a credible higher offer emerges, directors are effectively obliged to allow the offeror to do the due diligence required to obtain bank financing. Comprehensive discovery in court proceedings means aggrieved shareholders can cite any evidence of malfeasance. No such duty to shareholders or comprehensive discovery process exists in Japan. Courts defer heavily to directors' business judgment. Due diligence access is unlikely to be granted, so higher offers generally do not emerge. There have been some exceptions. In 2021, activist Yoshiaki Murakami completed a successful hostile bid for Japan Asia Group, paying double what the management's partner Carlyle Group had offered. Similarly, Yamauchi No.10, the family office of Nintendo's founding family, prevented a favorably priced agreed deal between Toyo Construction (1890) and Infroneer Holdings (5076), by announcing that it had made a higher offer that was being ignored by Toyo's management. Both of these cases, however, involved principal capital rather than activist funds. Last week, however, activist fund Effissimo Capital Management, launched a hostile tender offer for all the outstanding shares of car care products maker Soft99 (4464), derailing a proposed MBO by bidding at a 60% premium to the MBO price, which itself was a 55% premium to the pre-bid stock price. "Our back-of-the-envelope analysis suggests that as a result of the deal, related entities to Soft99's president could theoretically have received cash distributions amounting to almost double the value of their 31.4% stake in the company, valued at the MBO bid price, while gaining control of 100% of the company." states Halse. This is based on the company's large cash balance and holdings of real estate and other investments, and assumes typical LBO debt usage. Effissimo and other activist funds have previously bought large positions or commenced partial tender offers after a deal was announced, in an attempt to push for an increased price or later sue for appraisal rights where the process was particularly egregious. However, this is the first instance of an activist fund manager launching a hostile bid for all of the target's outstanding shares when an MBO was in process. Managers are generally precluded from taking such actions for a number of reasons. Their investor base is generally seeking public equity exposure, and do not want to or cannot hold non-public equity positions. If this hurdle can be overcome, a manager pursuing such actions would still face many tough questions from investors around "style drift," and loss of focus on the core strategy. Additionally, most activist fund managers are not set up from an investment team or operations standpoint to go down this path. Finally, a hostile tender must be cash-funded — whether using the fund's cash, or borrowing offshore against fund assets — at least until the deal is complete and control is assured. Japanese banks will not provide financing for hostile deals due to reputation risk and lack of due diligence access. Most activists do not have sufficient capacity to fund such deals. Effissimo, reported to be managing $13.6 billion in 2023 (per Capital AUM.com), is not bound by the latter constraint, at least in the case of smaller-size deals. How it is dealing with the other issues is information the notoriously secretive manager will likely keep to itself. For larger deals, the issue remains. The high-profile recent proposed 4.7-trillion-yen (about $32 billion) privatization of Toyota Industries (TICO) is a case in point. Minimal transparency was provided as to how the takeover price of 16,400 yen per share was reached. This left investors irate, as when TICO's extensive holdings of Toyota Group company shares are considered, the deal appears to place little value on the world-leading automobile compressor and forklift businesses. The government and the Tokyo Stock Exchange have tried to improve outcomes for non-insider shareholders in conflicted deals. The Ministry of Economy, Trade and Industry's 2019 Fair M&A Guidelines and 2023 Takeover Guidelines have improved matters and proved influential on board processes and court decisions. The TSE, since July, requires detailed disclosure of how the special committee of directors determined the fairness of the relevant deal. "The TSE does not have a large stick to enforce these requirements, but to not comply would send a message that judicial ears may not be able to ignore, and the knowledge that disclosure will be required may force better behavior by company boards," concludes Halse. "It will take time to observe the impact of these changes, but in the meantime, it is the activists riding to the rescue for minority shareholders."
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