Japan to tighten rules for shareholder proposals amid pushback against activism

[TOKYO] Japan is moving to tighten the criteria for submitting shareholder proposals, signalling a growing backlash from companies frustrated by intensifying pressure from activist investors calling for change.

The push for legislative change is being driven by lawmakers and business lobbies who argue that current rules have allowed what they describe as abusive proposals, forcing companies to divert resources away from long-term growth to deal with short-term investor demands.

An influential group of lawmakers from Japan’s ruling party plans to recommend raising shareholder proposal thresholds and restricting proposals on business execution to Prime Minister Sanae Takaichi next month.

“Japan’s rules on shareholder proposals and activism may be too lax, leaving more companies facing tough demands at shareholder meetings,” Junichi Kanda, a key member of the parliamentary group, told reporters last week.

Activist investors submitted shareholder proposals to a record 52 companies out of more than 2,000 firms holding annual meetings in June last year, up from 46 a year earlier, buoyed by corporate governance reforms first launched in the mid-2010s.

Easy threshold

Under current law, a shareholder may submit a proposal if they have held for six months either at least 1 per cent of voting rights or at least 300 voting units in companies.

Critics say the latter threshold has become far easier to meet in recent years as companies cut minimum share lot sizes and carried out stock splits, sharply reducing the cost of qualifying.

A justice ministry advisory panel issued an interim proposal on revising the Companies Act in March, presenting two options on shareholder proposal rules: limiting eligibility to holders of at least 1 per cent of voting rights, or retaining a unit-based criterion while raising the current 300-unit threshold.

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The justice ministry is seeking public comment before submitting a bill to parliament next year.

Some investors have come out against Japan’s pushback on corporate activism.

“In general, any measures which reduce shareholders’ ability to engage is a negative for corporate reform,” said Manoj Jain, co-founder and Co-CIO of Hong Kong-based Maso Capital. “Activist investors will now need to make a minor adjustment as they formulate their plans.”

Yutaka Suzuki, chief researcher at Daiwa Institute of Research, said the removal of the 300-unit rule alone would have little impact on activism. “It would affect individual investors, but most activists own more than 1 per cent of their targets,” he said.

Some business lobbies are calling to further raise the hurdles, increasing the 1 per cent threshold to 5 per cent or limiting the scope of proposals related to business execution. But such options are not under consideration at the justice ministry advisory panel right now.

Activists found fertile ground in Japan to push for higher dividends, share buybacks and structural changes, sharpening management focus on capital discipline and supporting the stock market’s record run.

Reuters reported on Monday London-based activist fund Palliser Capital has made a “significant” investment in factory automation firm SMC Corp, proposing it make a US$3.8 billion share buyback.

While keen to attract foreign investment, the Takaichi administration is also urging companies to step up capital spending and wage hikes to underpin long-term growth.

Takaichi said in November that there had been “a slightly excessive focus” on shareholders, but she has recently avoided direct comments on the issue, instead stressing the importance of allocating resources not only to shareholder returns but also to investment in people and new business areas. REUTERS