
IN-DEPTH: Activists push for disclosure amid M&A rebound in Japan

Amid a surge in governance-related demands targeting Japan-based companies, activists have increased their focus on improved disclosure as they move to exploit a tougher governance landscape to make their targets more attractive to potential suitors.
According to Diligent Market Intelligence (DMI) data, 47 Japanese companies were subject to governance demands in the first nine months of this year with dissidents frequently pushing for improved disclosure and transparency in their engagements with boards. It marks the second year in a row that governance has topped the list of demands, followed closely by returning cash to shareholders, traditionally the most popular of activist asks.
The kind of information sought by activist investors has varied from calls for management plans with specific quantitative targets, more details on non-core assets such as real estate or equity cross holdings, and policies related to director independence and board skill matrix.
Ripe for rollup
The increased appetite for information is driven in part by investor efforts to value companies amid signs of a possible pick up in M&A activity in Japan. The M&A market in the region delivered a strong first half, with deal volume up around 20% compared to same period in 2023, according to a recent report by JP Morgan.
The investment bank noted that the Prime segment of the Tokyo Stock Exchange, designed to represent the country’s best firms, is crowded with 1,655 constituents. It further found that some two-thirds of the country’s 4,000 or so listed firms have zero analyst coverage.
“Based on feedback from global investors I speak with, there are too many companies that should not be listed,” an investment banker told DMI. “They should either be bought out or they should be privatized.”
One of the biggest deals currently in the works concerns Japanese retailer Seven & i Holdings which is reviewing a revised $48 billion bid from Alimentation Couche-Tard (ACT) and a more recent management buyout offer from Vice President Junro Ito. An earlier $39 billion bid advanced by ACT was rejected by the target for being "opportunistically timed and grossly" undervaluing its standalone path. Amid concerns that Seven & i might pass up the revised ACT offer, shareholder Artisan Partners last month called on the company to improve transparency and accountability, including by making public the names of the directors serving on the special committee that is reviewing the bid. The asset manager has since urged Seven & I to weigh the two proposals on the table as part of a formal sale process, which it feels could attract other bids.
This month has also seen several activists use M&A to exit profitable positions in Japanese companies. On November 7, Oasis Management announced the sale of its controlling stake in Tokyo-listed builder Raysum to Hulic after the Japanese real estate giant acquired nearly 30% of the company’s shares through a tender offer. Oasis took control over Raysum through a tender offer in late 2022, after which the activist fund designated two board members. Since then, Raysum's stock has posted a total shareholder return (TSR) of roughly 300%, Oasis noted in its announcement.
In early November, buyout firm KKR acquired 35% of Japanese software developer Fujisoft, including from activists 3D Investment Partners and Farallon Capital, owners of roughly 23.5% and 9.2% stakes, respectively. Fujisoft’s share price has tripled in value since 3D first called for improvements in early 2022.
Benchmarking
The rising demand for information is also influenced by ongoing governance reforms in Japan, especially the Tokyo Stock Exchange’s increasing focus on the valuation metrics of its listed companies. Best known is the “recommendation” that listed companies maintain a price-to-book ratio of one or higher. Should they fail to do so, they are expected to provide a detailed explanation of how they will achieve this goal.
Yet some investors argue that such metrics are misleading due to a traditional lack of disclosure related to real estate holdings and other non-core assets.
"Book value is not real because [some Japanese] companies don't mark to market their undervalued real estate, and so on," one activist fund manager who asked to remain anonymous, told DMI.
In October, U.K.-based activist fund Palliser Capital took a stake in Japanese real estate company Tokyo Tatemono and called on the company to produce and disclose a clear road map for identifying its non-core assets, the disposal of unnecessarily held properties and the unwinding of a significant portfolio of equity stakes in other listed companies, the largest of which is a 5.3% stake in Hulic – the same Japanese commercial property manager that bought a controlling stake in Raysum from activist fund Oasis.
A more recent example arose on November 8 when Swiss-Asia Financial Services proposed partial amendments to Japan Business Systems' articles of incorporation regarding its policy on real estate acquisitions and the formulation and disclosure of a long-awaited plan to improve operational and financial performance.
“It’s a new world where we're going to start benchmarking you to the best that you can be,” Oasis Capital founder Seth Fischer told DMI in a recent interview.