Shareholder activist strategies

Strategies

What common strategies do activist shareholders use to pursue their objectives?

In most cases, activist shareholders try to negotiate with management privately. Aggressive activist shareholders sometimes disclose their proposals or requests publicly without any private negotiation, in order to put pressure on management.

With respect to general shareholders’ meetings, which must be held at least annually, activist shareholders submit shareholder proposals as mentioned in question 6, and sometimes wage proxy fights to pass their proposals. Such shareholder proposals include proposals to appoint one or more outside directors. Another form of proxy fight is opposing a company’s slate. Activist shareholders have rarely been successful in gaining mainstream investor support of such proxy fights. However, in 2017, Kuroda Electric’s general shareholders’ meeting approved the only candidate on the dissident slate.

In addition to the above strategies, while it is not so common, activist shareholders can also threaten to launch a TOB for target shares. Some activists use the threat of a lawsuit against the targeted company or its management. However, regulations on giving benefits to shareholders prohibit any person, including activists, from demanding money or any form of benefit, including a company buy-back of activist shares, in return for withdrawing their shareholder proposals or requests.

Processes and guidelines

What are the general processes and guidelines for shareholders’ proposals?

In principle, in a listed company, a shareholder who satisfies certain requirements may propose a matter to be discussed at a general shareholders’ meeting up to eight weeks prior to the meeting (section 303, the Companies Act). The eligible shareholder must possess 1 per cent or more of the issued and outstanding shares, or 300 or more voting rights, for more than six months before submitting the proposal. The same shareholding minimum and shareholding period apply if a shareholder demands that the company describe the specific content of a proposal in the convocation notice of a general shareholders’ meeting at the company’s cost. A company may limit the number of words of the proposal description in accordance with its internal rules and procedures for managing shares. If the proposal violates any law or the articles of incorporation of the company, or if a substantially similar proposal was not supported by more than 10 per cent of the voting rights of all shareholders during the three-year period immediately preceding the proposal, the company may decline to include the proposal in the convocation notice.

If a shareholder does not demand the inclusion of its proposal in the convocation notice, there are no shareholding minimums or shareholding period requirements, and every shareholder who has a voting right may submit a proposal at any time. However, a proposal is not permitted if it violates any law or the articles of incorporation of the company, or if a substantially similar proposal was not supported by more than 10 per cent of the voting rights of all shareholders during the three-year period immediately preceding the proposal.

The above rules apply to every shareholder regardless of the nature of the shareholder.

Owing to several incidents, the Ministry of Justice, which drafts the Companies Act and its amendments, has tried to submit a bill to defend against abusive proposals, by limiting the number of shareholders’ proposals and prohibiting certain proposals that mainly disparage others or disturb the shareholders meeting.

May shareholders nominate directors for election to the board and use the company’s proxy or shareholder circular infrastructure, at the company’s expense, to do so?

Shareholders may nominate directors who are not on the company’s slate. Nominations are considered to be shareholder proposals. See question 7 for the appropriate procedures.

May shareholders call a special shareholders’ meeting? What are the requirements? May shareholders act by written consent in lieu of a meeting?

For a listed company, a shareholder who has more than 3 per cent of all voting rights during the six-month period immediately preceding the proposal may call an extraordinary shareholders’ meeting (section 297, the Companies Act).

If the company does not send the convocation notice promptly, or if the convocation notice does not indicate that the extraordinary shareholders’ meeting will be held within eight weeks of the shareholder’s demand, the demanding shareholder may call, by himself or herself on behalf of the company, an extraordinary shareholders’ meeting with court approval (section 297, the Companies Act). The courts must approve such convocation unless circumstances indicate that the shareholder is merely abusing his or her rights to create a nuisance or other similarly irrelevant purposes.

If shareholders unanimously approve a proposal by written consent in lieu of a meeting, such approval is deemed to be the equivalent of a resolution of a shareholders’ meeting (section 319, the Companies Act). If the consent is not unanimous, the consent is not equivalent to a resolution. In listed companies, each shareholder may exercise its voting rights in writing or through a website without physically attending the meeting.

Litigation

What are the main types of litigation shareholders in your jurisdiction may initiate against corporations and directors? May shareholders bring derivative actions on behalf of the corporation or class actions on behalf of all shareholders? Are there methods of obtaining access to company information?

Shareholders may bring derivative actions (section 847, the Companies Act). Although it may be theoretically possible to bring a tort claim against the company in some instances, the derivative actions are the main type of litigation shareholders initiate.

Shareholders who have continuously held shares for more than six months may demand that the company sue its directors (and other officers, if applicable). If the company does not file the lawsuit within 60 days of the demand, the shareholders may bring a derivative action on behalf of the company. The shareholders of the parent company may also file a derivative suit against directors (and officers, if applicable) of wholly owned subsidiaries of the parent company (ie, a double or multiple derivative suit) if such subsidiary does not file the lawsuit within 60 days of the demand against the subsidiary by the parent company’s shareholders.

The company cannot strike down the lawsuit by itself even if it is an abusive action by a shareholder. However, if it is abusive, in theory, the company may pursue a tort claim against the shareholder and request damages. In order to ensure that the company may recover damages if a derivative action is found to be abusive, the court may order the shareholder to place a certain amount in escrow prior to the start of a derivative action (section 847-4, paragraph 2, the Companies Act).

Japan does not have class action lawsuits similar to those in the United States, and a person cannot file a multi-plaintiff litigation without obtaining the approval of each plaintiff. Although a new type of ‘consumer litigation’ was introduced on 1 October 2016, securities transactions may be outside the scope of this new type of litigation, as tort claims under the new type of litigation are limited to claims based on the Civil Code of Japan, even though litigation in Japan regarding securities transactions belongs to the wider category of tort claims.