Koito

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Koito Manufacturing, Ltd.

2. What were T. Boone Pickens’ motives when he bought the share? As the largest shareholder of Koito Manufacturing, is he entitled to representation on the board, does Japanese law allow for that? If not what in the law could he use to get an equivalent result?

T. Boone Pickens was known in America as an aggressive hostile bidder for corporations that he targeted as good investment opportunities. Mr. Boone complaineid that the Japanese market was essentially closed to American investors wanting to invest (with full rights) in Japan. The biggest problem were the silent barriers caused by business customs. Boone stated that the U.S. sentiment toward Japan would become hostile if Japan did not open its market more to American investors. In 1989, Boone announced that he had bought 32.4 million outstanding shares (20.2%) of Koito. He saw this purchase as a “test case” to determine the accessibility of the Tokyo market. In september Boone extended this amount to 42.2 million (26%). With this amount Boone would be the largest shareholder of Koito (Exhibit 1).

Because the holding of Boone exceeded the 10% he was allowed to inspect the Koitos’ accounting records and to demand for confidental financial documents. Analysts considered a takeover unlikely, since the remaining 60 to 65% was still in “friendly” hands. Mr. Pickens did a request for board representation, but Mr. Matsuura told the press,: “ We gave no specific answer but explained generally that it is not a custom in Japan to just say, I’ve become a major shareholder so I should become a director.“ Other directors said they don’t like Mr. Pickens to participate, because he works in the oil business and has no experience in a manufacturing industry, so we don’t want to recognize him as a manager.

In Japan the common shareholders as a whole elect the board of directors and have the ultimate legal control. Corporate Governance in Japan is strongly influenced by relationships: relationships between the company and its employees who expect a lifetime employment, and the relationship between the company and its customers and suppliers (keiretsu). These relationships influence board composition and company policy. Most of the time long-term employees are the primary source for the board of directors. This also explains why the policy is more employee oriented than shareholder oriented (Loewenstein, 2001).

You can see this clearly in the Toyota group as well. They were estimated to have at least 26% of their shares held within the group. Corporations and financial institutions with which Toyota had business dealings owned 87.7% of its shares and individual shareholders only held 9.3% of Toyota’s common stock. When Mr. Pickens requested for board representation he was overwhelmingly dienied by 60% of shareholders of the ‘management’s pocket’.

These cross-shareholding agreements are very common in Japan. The ownership is higly concentrated and the divergence between cash-flow rights and control rights is large (Claessens, Djankov, Fan & Lang, 2002). This makes it very difficult to get in the board of a Japanese corporation, especially as an American outsider.

What to use to get an equivalent result? He may expropriate minority shareholders by tunneling resources from firms where has have low cash flow rights to firms where he has high cash flow rights. Mr. Pickens can do this by buying shares in another company in which the controlling shreholder has some shares (Bertrand, Mehta & Mullainathan, 2002).

3. Besides board representation, T. Boone Pickens demanded higher dividend payouts. Were his demands justified? Provide quantitative evidence to back your answer. Is there anything in the Japanese commercial code that would allow Pickens to try to get more dividends? If yes, why doesn’t he use this? If not, based on your experience as an international investment banker, what changes would you recommend him to propose?...
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