INVESTOR REVOLT SHOCKS CORPORATE JAPAN

UNCLAS SECTION 01 OF 02 TOKYO 001495 SIPDIS DEPT FOR EAP - AMBASSADOR HASLACH ALSO FOR EEB/IFD: DIBBLE AND KAMBARA NSC FOR TONG DEPT PASS USTR FOR CUTLER AND BEEMAN USDOC FOR 4410/ITA/MAC/OJ JUSTICE FOR ANTITRUST DIVISION - CHEMTOB TREASURY DEPT FOR IA/CARNES AND POGGI GENEVA FOR USTR E.O. 12958: N/A TAGS: EINV ECON OECD JA SUBJECT: INVESTOR REVOLT SHOCKS CORPORATE JAPAN REF: A. TOKYO 317 ¶B. 07 TOKYO 3689 Sensitive But Unclassified. Please Protect Accordingly. ¶1. (SBU) Summary: The May 29 ousting of the directors of a mid-sized Japanese company by a group of investors led by controversial U.S. fund Steel Partners set a new precedent for shareholder activism in Japan. Unlike Steel Partners' previous moves, this latest has drawn only muted GOJ reaction. Both GOJ and business leaders, however, will watch closely how events unfold to determine the implications for corporate governance in Japan. End Summary. ¶2. (U) Led by U.S. hedge fund Steel Partners, shareholders of Alderans Holdings, a medium-sized Japanese maker of hair replacements, voted May 29 to remove nine sitting directors, including the company's CEO and to elect two new independent directors to the board. This event marks the first time in memory investors in a Japanese listed compnay voted to remove directors for poor performance. Steel Partners, the firm's largest stockholder with 26 precent of Alderans' shares, has been in a year-long battle with the firm's management and failed in a April 2007 bid to take over the company. Steel Partners changed its strategy this year and joined with other institutional investors, including U.S. pension fund Calpers, to oust the management. ¶3. (U) Market reaction was immediate and positive. Alderans' stock rose 8.7 percent directly following the vote, and soared an additional 11 percent the next day, May 30. Alderans' stock until recently had been trading 40 percent below its 52-week high set in June 2007. Alderans' executives May 30 announced the nine ousted directors -- together with the newly elected board members -- will constitute a "provisional" board of directors until an extraordinary shareholders meeting can be convened to elect a permanent board. Although It Was Always Possible, Result Was Still a Surprise -------------- -------------- ¶4. (U) While such a shareholder revolt was possible in Japan, few analysts considered it likely, given existing networks of cross-shareholdings and the generally passive nature of Japanese retail investors. Nikko Citigroup equity analyst Tsutomu Fujita, however, has long argued Japan's 2006 Company Law strengthened the power of shareholders by changing the rules to requirement only a simple majority, rather than the previous two-third vote, to remove existing directors. In a May 30 report, Fujita noted, "Although it is possible for companies to resist hostile takeovers by issuing new share warrants in a 'poison pill defense' it is extremely difficult for companies to use so-called poison pills against hostile takeovers by means of director elections." Fukita also argues shareholder power in Japan is also potentially boosted by the fact that, unlike U.S. boards, Japanese directors are all re-elected annually. ¶5. (SBU) METI Administrative Vice Minister Takao Kitabata, a scathing critic of Steel Partners in the past (reftels),was muted in his response to the Alderans vote. Asked at his regular weekly press briefing May 29 if ousting Alderans' board might have an impact on upcoming shareholder meetings, Kitabata refused to comment directly. He only noted that "as a general rule, shareholders determine corporate policies and are free to vote as they wish individual cases." When asked if he stood by his July 2007 criticism of Steel Partners as "a greenmailer," Kitabata said his views "remain the same", TOKYO 00001495 002 OF 002 but quickly added that was not a comment on the current Alderans case. A Turning Point in Japanese Corporate Governance? -------------- -------------- ¶6. (SBU) An executive for a Tokyo-based institutional investor services company described the Alderans vote May 30 as a case of "You break it, you bought it." Steel Partners, he said, has "broken Alderans' board" and Japanese executives and investors will now be watching what the Fund does next. If Steel takes advantage of the uptick in Alderans' share price to "flip" the company for a quick profit, he warned, it would confirm the prejudices of many Japanese about the short-term attitude of activist funds. If, however, Steel unveils a corporate restructuring plan, brings in new outside management, and remains invested in the company until a turnaround is complete, it could demonstrate to executives and GOJ policy makers the ability of M&A -- even hostile deals -- to foster positive corporate restructuring. SCHIEFFER