Nearly half of Japan’s listed companies are tied to a founding family, many of which no longer have enough equity to guarantee control
[TOKYO] Ishikawa is a remote, mountainous prefecture bordering the Sea of Japan, but the fate of a drug store chain whose local roots go back to 1869 has implications for Tokyo’s financial markets hundreds of kilometres away.
The company, Kusuri no Aoki Holdings, is run by two brothers who are the sixth generation of the founding family. They are fighting for control of the firm with their largest outside shareholders, Aeon and the activist fund Oasis Management.
President Hironori Aoki and his younger sibling Takanori, who increased their personal stakes in the company through a controversial stock option issuance about a year and a half ago, have called for an emergency general meeting on Feb 17. On the agenda is a so-called poison pill defence that threatens to dilute the holdings of Aeon and Oasis.
Nearly half of Japan’s listed companies are tied to a founding family, many of which no longer have enough equity to guarantee control. The Aoki brothers’ move runs counter to a broader trend in corporate Japan, where such defences have been in decline since peaking in 2008. Both the Tokyo Stock Exchange and the government have discouraged such tactics in a bid to protect minority shareholders and make Japan a more attractive market for overseas investors.
“For founding families of listed companies, the question is what kind of commitment do they want to have towards their company and what should their capital policy look like to support that,” said Takahiro Kazahaya, a retail analyst at UBS Group. “This isn’t just a story about some rural company, it’s about Japanese companies in general.”
The fight over Kusuri no Aoki echoes the struggle over the privatisation of Toyota Industries, which pits the Toyoda family against minority shareholders, including the activist fund Elliott Investment Management. If the Aokis lose the fight, it will likely embolden activists to go after more family companies. If they are able to enact the defence, it will be a sign that for all of the changes in Japan’s capital markets over the last decade, there is still resistance among some minority shareholders to displacing the families that are seen as pillars of the community and tied to the fate of the firms.
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The backdrop is the business landscape of rural Japan. As the dwindling population can no longer support specialised retailers, drugstores have increasingly turned to selling food. A shrinking market means that the firms that can achieve economies of scale end up driving out their less efficient competitors. The chains also struggle to hire professionals, who are reluctant to live in small, regional cities.
The biggest threat to Kusuri no Aoki is Aeon, itself a company with deep historical roots which date back to 1758. The founding Okada clan is still represented by the company’s chairman.
For Aeon, Kusuri no Aoki represents a potential valuable addition to its strategy of consolidating Japan’s fragmented retail market. For years, the two companies had a partnership in which Kusuri no Aoki stocked Aeon’s private brand merchandise.
Despite being smaller, Kusuri no Aoki boasts an operating margin of 5.3 per cent, more than double that of the 2.4 per cent of the larger chain.
The relationship between the firms grew tenuous as Aeon made acquisition after acquisition among drug store chains. That culminated in buying a majority stake in Tsuruha Holdings and turning it into the country’s largest drugstore group, with more than 5,600 stores and about a quarter of the country’s market.
Since Tsuruha already had a 5 per cent stake in Kusuri no Aoki, that acquisition further tightened Aeon’s grip on the smaller firm.
In order to take control of Tsuruha, Aeon ended up buying a 13.6 per cent stake in the company from the Aoki brothers’ nemesis, Oasis.
The founder of Oasis, Seth Fischer, has been trying for years to remove the Aokis from their namesake company. In a highly unusual move for Japan, the Hong Kong-based fund sued the two brothers over stock options the company had granted them. Their mother, who has no official role in the company, was included in the lawsuit as an heir to her husband, who was the company’s former president.
“Activism is becoming more challenging,” said Daisuke Uchiyama, a senior strategist at Okasan Securities. “Oasis is taking a tough stance. Activists need to make more forceful demands to generate returns.”
The fund said the measure diluted the stakes of other shareholders and the options were priced far below their actual value.
“This is one of the worst, if not the worst, cases of governance we have seen in Japan,” said Fischer. “We have seen the company issue stock options at a 99 per cent discount to fair value, effectively enabling the brothers to buy shares at an incredibly low price.”
The risk for Kusuri no Aoki is that Oasis will sell its shares to Aeon in the same way it sold its stake in Tsuruha.
The breaking point came when Aeon started buying up shares of Kusuri no Aoki in small batches in the open market, which it said was in response to the dilution of its stake stemming from the stock options over a year ago.
With its independence threatened, Kusuri no Aoki ended the cooperation. The company demanded that Motoya Okada, a descendant of Aeon’s founding family, leave Kusuri no Aoki’s board, resulting in his resignation in January. The firm has also drawn up plans to stock its own private brands in its stores instead of relying on Aeon. The poison pill would give the brothers an edge in keeping control.
“As a shareholder of Aoki, Aeon places importance on whether it contributes to enhancing Aoki’s corporate value and in addition, the common interest of its shareholders,” Aeon said.
Kusuri no Aoki is opposed to a single shareholder or group having a stake of 20 per cent or more without approval from the board, according to a company statement. The poison pill defence would enhance corporate value and the common interest of shareholders, the statement added. The Aoki brothers declined a request for an interview.
Both Institutional Shareholder Services and Glass Lewis, independent proxy advisory services, have recommended voting against the poison pill. ISS highlighted concerns about a lack of a critical mass of independent directors on Kusuri’s board and Glass Lewis flagged that there were insufficient safeguards for shareholders.
Victory will come down to who can better convince the other minority shareholders. The Aokis control about 36 per cent of the shares while Aeon and Oasis have roughly 26 per cent, according to Bloomberg’s calculations.
In Japan’s hinterlands, resistance to the demands of shareholder activists is more widespread than in the capital. While Oasis and Aeon flag corporate governance issues, the brothers are betting they will win support from minority shareholders because they are committed to a company that faces a declining customer base and workforce as more people move to the megacities of Tokyo and Osaka.
“Aoki is typical of the kind of firms that survive in regional Japan,” said Seigo Uchida, an associate professor at Niigata University of Pharmacy and Medical and Life Sciences. “With a shrinking population and labour shortages, they depend on the strong leadership of their owners.” BLOOMBERG
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