Diamond obtains memo evidencing "secret agreement" in Infroneer TOB for Toyo Construction! Suspicions deepen in conflict with Nintendo founding family

A “secret agreement” has emerged as a point of contention as the conflict between Toyo Construction Co., Ltd., (“Toyo”) (TSE: 1980) a marine civil engineering company, and the asset management company of Nintendo's founding family (“YFO”) that made a proposal to acquire Toyo intensifies. Under this “secret agreement”, Toyo’s board members received informal promises that they would join the management of Infroneer Holdings (“Infroneer HD”), a major general contractor, following Infroneer HD’s proposed acquisition of Toyo. Diamond’s Editorial Department has obtained an internal memo related to this secret agreement. We will fully disclose the contents of this memo, which contains the remarks of a Toyo representative suggesting the existence of the secret agreement. 

Toyo Construction announces it will not convene an extraordinary general meeting - Nintendo’s founding family asserts there was a "secret agreement"

“Inappropriate conduct that constitutes an abuse of rights:”

Toyo, a marine engineering company, announced on March 10 in this way that it would definitely not hold an extraordinary shareholders meeting in response to a request by Yamauchi - No. 10 Family Office (YFO), the asset management company of Nintendo's founding family, which proposed a takeover bid (TOB) for Toyo.

Just three days after Toyo’s “total rejection”, YFO took the fight to the courts. YFO petitioned the Osaka District Court for permission to convene an extraordinary shareholders meeting.

YFO had already formed the intent to raise a shareholder proposal at Toyo’s annual shareholders’ meeting in June calling for the appointment of new directors recommended by YFO ([Scoop] Nintendo's founding family’s fund to make shareholder proposal to Toyo Construction calling for the election of directors at June shareholders meeting). The battle is intensifying ahead of the annual shareholders’ meeting.

YFO's proposed acquisition of Toyo goes back about a year. In March 2022, Infroneer HD, a semi-major general contractor that owns Maeda Corporation, launched a TOB for Toyo. YFO then stepped in. 

In May 2022, YFO made a proposal to privatize Toyo via a TOB on the condition of friendly negotiations. YFO’s TOB price of JPY 1,000 per share significantly exceeded Infroneer HD’s TOB price of JPY 770 per share.

After Infroneer’s TOB failed, YFO and Toyo signed a non-disclosure agreement and held several meetings. Mr. Banjo Yamauchi, YFO representative and member of the Nintendo founding family, and Mr. Kyoji Takezawa, president of Toyo, held top-level meetings also.

But their arguments went past each other. Toyo argued that Toyo’s existence would be jeopardized by going private. YFO complained that Toyo did not even attempt to respond to YFO’s attempts at fulsome consultation. 

YFO’s problem with Toyo was that Toyo did not even move to consider YFO’s acquisition proposal. YFO's aggressive push this year, including to announce a shareholder proposal, is believed to be motivated by its distrust of Toyo.

YFO’s demand for the convening of an extraordinary shareholders meeting can be said to be an extension of this distrust. "We will reveal Toyo’s corporate governance problems": YFO explains why it requested the appointment of third-party investigators under the Companies Act by convening an EGM in this way.

YFO cites the existence of a “secret agreement” as one of Toyo’s problems. In its proposal, YFO criticized Toyo’s board members for entering into a secret agreement to participate in Infroneer’s management and not disclosing it. 

So, did such a secret agreement actually exist? The Diamond Editorial Department obtained an internal memo describing an exchange between Toyo and YFO representatives. This exchange reveals the existence of a secret agreement.

On the next page, we will fully disclose the remarks made in the memo by the Toyo official. We will also clarify the legal issues that would arise if there is a secret agreement.

Toyo Executives "agreement to join the board" We didn’t put it in writing because “it would look like our CEO wanted to protect his job.”

The memo obtained by the Diamond Editorial Department is dated April 27, 2022, during the period that Infroneer’s TOB for Toyo was ongoing. A YFO executive who was in the process of acquiring Toyo’s shares had the following conversation with a Toyo executive. 

The following is a portion of the exchange between the two parties related to the secret agreement.

YFO Executive: What kind of people are planned to join Infroneer Holdings?

Toyo Executive: It is too early for that. Nothing is promised yet. 

YFO: But you say it is in the spirit of equality (of Infroneer and Toyo), so what will the future structure of Infroneer look like?

Toyo: There is something we have been talking about internally, but if we make it into a contract, we will have to put it in writing, or rather, we will have to submit it in the tender offer registration statement. We decided not to put it in writing because it would look like both the board members and the CEO were trying to protect their jobs. 

YFO: Specifically, what is the current situation?

Toyo: It has not been decided yet because it is unclear whether the TOB will succeed or not. If it does succeed, so and so persons may be appointed to this or that position.  

YFO: So, does that mean that the management structure has not been decided at all, but it has been decided that it will be integrated (with Infroneer)?

Toyo: The parts that have been firmly agreed are not put in writing. We have discussed them in person instead. 

YFO: You are discussing them?

Toyo: We decided not to put it in writing. But on the whole, we have discussed.

YFO’s executive repeatedly asked whether it was decided if Toyo’s board members will be appointed as directors of Infroneer after the TOB. In response, the Toyo executive initially said that there is not such a promise, but gradually admitted that they had discussed with Infroneer. Further, the Toyo executive also clearly stated that they did not disclose this in the tender offer registration statement.

Let’s see how the exchange between the two went on.

YFO: From your discussions, specifically how many people will you be able to put in (Infroneer’s board of directors)? 

Toyo: Due to their (Editorial Department note: Infroneer) board composition, they are a company with committees, so half or more of the directors are going to be outside directors, so we expect that we will have one internal board seat and another outside director. So the board would be something along those lines. 

YFO: I see, so only one of you will join.

Toyo: Because the other companies (Editorial Department note: Infroneer’s other subsidiaries such as Maeda Corporation etc) only sent one person. Currently only Maeda has two people, and I don’t know what they will do about that. That’s why we’ve been told that they will definitely let us send directors.  

YFO: Understood.

The statement made by the Toyo executive that “we’ve been told that they will definitely let us include [directors]” strongly suggests that there was an informal “secret agreement” regarding joining the board of directors. 

However, Toyo completely denies the existence of the secret agreement. Toyo claims in the documents it has disclosed as required by law that “there is no ‘secret agreement’ as YFO and others claim.”

“Not disclosing agreed matters” violates laws and regulations -  Conflict of interest between the company and directors who obtained informal promises

If there was a secret agreement and the failure to disclose it was intentional, serious problems would arise legally, not use in terms of corporate governance.

One example is the potential violation of the Financial Instruments and Exchange Act. This Act provides that any agreements between a tender offeror and the directors of the target company at the time of the TOB must be disclosed. 

In other words, if Toyo and Infroneer intentionally failed to disclose an agreement, even if it was oral, this could still be recognized as obstructing the proper decision-making of investors. 

That's not all. If Toyo’s board members who entered into an agreement to become board members of Infroneer were involved in the decision-making process to support Infroneer’s TOB, this is also a big problem. 

A person who has reached an agreement to obtain a director position at Infroneer is in a conflict of interest with Toyo and Toyo’s shareholders. Therefore, if they are involved with Infroneer in this way, they may not be motivated to extract more favorable terms from Infroneer. 

It is not clear whether the existence of the secret agreement had an impact, but it is difficult to say that Toyo did well in its negotiations with Infroneer.

For example, Toyo’s special committee which considered Infroneer’s TOB requested Toyo’s executives to negotiate to raise the TOB price, but the price did not increase by even one yen. 

The suspicions of a secret agreement that have come to light will once again bring Toyo’s governance into question. Toyo endorsed Infroneer’s TOB, and did not even consider YFO’s financially superior TOB with a higher price. It will be necessary to explain such discrepancies in judgment to investors.

The courts will decide on the convening of the EGM, however the existence or not of a secret agreement will likely emerge as a point of contention that could affect the outcome of the battle between the two companies. 

Diamond , Inc.