Japan’s government spared showdown over Shinsei poison pill

Late on Wednesday evening Tokyo time, Japan stood less than 24 hours away from the most pivotal shareholder showdown in the history of its financial services industry: a proxy battle over the future of Shinsei Bank and the culmination of the sector’s first ever hostile takeover attempt.

Then very suddenly, it wasn’t. Shinsei’s poison pill defence strategy was abruptly withdrawn, Thursday’s extraordinary general meeting cancelled and the way apparently cleared for the breaking of Japan’s great hostile takeover taboo. It is far from clear, however, whether the forces of change or the backroom machinations of Old Japan won the day.

The latest torment around Shinsei — the institution born from the 1998 collapse and forced nationalisation of the Long Term Credit Bank — began in September with a $1.1bn hostile bid.

The move came from one of the most controversial and successful figures in Japanese finance: the online brokerage tycoon and SBI chief executive, Yoshitaka Kitao. His relish for disruption is unabashed and his stated aim for the past few years has been to upgrade his various online businesses into Japan’s “fourth megabank”.

That ambition, for which effective control over Shinsei would be the linchpin, has so far involved buying a series of minority stakes in various ailing regional banks — with, many observers suspect, a tacit nod of political gratitude.

At the time of SBI’s move on Shinsei, Kitao’s company held 20.3 per cent in its quarry. Its rather unconventional tender offer envisages it adding an additional 27.6 per cent to take the total stake to 48 per cent — just shy of the 50 per cent level that would avoid a drawn out approval process and onerous capital requirements.

Shinsei’s response was to propose a poison pill defence, which SBI attempted to block in court, but failed. Shareholders were due to vote on it on November 25 after Shinsei appeared to come up short in its scramble to find another buyer.

The natural vote of the pro-governance progressive might be against any form of poison pill as it can entrench management and hinder shareholders from profiting from a takeover offer. But if successful, SBI’s bid would give Kitao cheap, low-responsibility control over a major bank and create company structure that might disadvantage minority shareholders.

Given that and other factors, proxy advisers ISS and Glass Lewis, counterintuitively, had made recommendations in favour of the poison pill. Some domestic and foreign investors also were backing it. But there were more twists to come.

Shinsei’s history has resulted in the Japanese government holding 22 per cent of the bank’s voting rights via two entities — the Resolution & Collection Corporation and the Deposit Insurance Corporation.

The RCC and DIC have an obligation to return roughly Y350bn to taxpayers for the original bailout, but could only do so by exiting Shinsei at a price of Y7450 per share. SBI’s offer, even with its premium, came in at Y2,000, which means that the government is unlikely to sell into it. Nevertheless, people close to the RCC and DIC let it be known this week that they would be voting against the poison pill — a stance that some have taken as a sign that there is now a government faction eager to countenance hostile takeovers.

The prospect of the RCC, DIC and Kitao combining to successfully vote down Shinsei’s poison pill thus appears to have forced the bank to pull the defence before that humiliation. Some activist investors, who have fought the intransigence of corporate Japan over many years, roared in triumph and declared the proxy advisers were caught on the wrong side of history.

Finally, they argued, the fear of state disapproval of hostile bids, which has long constrained companies and private equity, should now lift and Japan would see a long-absent market for corporate control evolve.

They may be correct, but sceptics suggest this outcome might feel more plausible with a hostile takeover that raises fewer questions over the desirability of its end result. Particularly troubling is the implied government endorsement of a deal that does not look like a step forward for governance or protection of minority shareholder interests.

CLSA analyst Nicholas Smith notes there are a number of former — and potentially highly influential — senior bureaucrats drawn mostly from the financial services regulator on the board of SBI and its group of companies. “I fear that this may be seen,” says Smith, “as a stick of Brighton Rock with ‘conflict of interest’ written all the way through.”

leo.lewis@ft.com