Daily Management Review

Japan's New Corporate Governance Rules Will Be Tested By Bid To Take Over Toshiba


Japan's New Corporate Governance Rules Will Be Tested By Bid To Take Over Toshiba
The recent changes in rules in Japan for improving transparency of corporates and protect the interest of minority shareholders will be tested by the possible bid for Japanese conglomerate Toshiba Corp as well as the corporate governance at a company that has been hit by scandals in recent years. 
This takeover bid has now cast the spotlight on the efforts of the government of the third largest economy of the world to attract more foreign investments even as global private equity companies are on the lookout for more big-ticket deals in the country.
A series of accounting and other scandals has hit Toshiba in recent years along with the resignation of the company’s CEO Nobuaki Kurumatani earlier this week because of criticisms on corporate governance issues. Recent reports have suggested a number of buyout companies are preparing bids to take Toshiba private. 
Analysts expect the board of the Japanese conglomerate, which has interests in a range of areas including escalators and sewerage plants, to consider the bids by a number of private equity firms including one from CVC Capital Partners that had proposed a deal worth $20 billion.
"This is the next big corporate governance test for Toshiba: whether they will run an open and transparent process, in line with METI's Fair M&A Guidelines," said Seth Fischer, Oasis Management chief investment officer and Toshiba shareholder.
New rules to provide greater protections for minority investors during transactions were brought in 2019 by Japan's Ministry of Economy, Trade and Industry (METI) which included laying down of a process to securing fair deal terms.
Under the new rules, Toshiba for example, will have to set up a special committee of independent outside directors and auditors for evaluating the proposed deal.
However some investors have criticised the rules because of their voluntary nature.
The third largest equity market of the world, Japan ranked was ranked seventh in Asia in terms of corporate governance – even behind Malaysia and Thailand, according to the latest list prepared by the Asian Corporate Governance Association (ACGA).
Codes of best practice and guidelines were the focus of the recent measures taken in Japan to improve governance standards instead such efforts being focused on company law and regulation, said the investor organisation.
"Takeover protections for minority shareholders in Japan, are much weaker than in other developed Asian markets such as Hong Kong and Singapore," said Jamie Allen Secretary General of the ACGA.
The foreign ownership of strategically important companies is another of the complicated elements for investors as these regulations were recently tightened in Japan. The regulations in this regards could potentially allow the government to prevent the attempted takeover of Toshiba, whose technology is used in defence systems, by foreign private equity bidders.
Allen cited concerns of some investors that if Toshiba was taken private with government help and support, it could result in similar measures being taken for other undervalued companies in 'restricted industries'.
The bid for Toshiba could also lead to more corporate activity in Japan which in turn could result in better and improved standards of corporate governance, said Ashley Pittard, head of global equities at Sydney-based Pendal Group.
"Japanese companies are making improvements in corporate governance aspects but it's moving at a glacial pace," he said.