Toyo Construction proposed to break off its alliance with Infroneer, but then endorsed Infroneer’s buyout proposal soon after. Was a 'secret agreement' the reason for Toyo’s change of heart?

Toyo Construction President Kyoji Takezawa (left) and Senior Managing Director Toju Obayashi at a press conference on May 24 

Toyo Construction Co., Ltd. (“Toyo”), a marine civil engineering firm, proposed to break off its capital partnership with second-tier general contractor Infroneer Holdings (“Infroneer”) after Infroneer made a takeover offer for Toyo last year, according to people familiar with the matter. In addition, Toyo made the decision to be taken private by Infroneer shortly thereafter. The asset management company of the founding family of Nintendo (“YFO”), which intervened in Infroneer’s attempted takeover of Toyo, asserts that there was a "secret agreement" between Toyo and Infroneer regarding, among other things, positions at the merged company post takeover. The new evidence of Toyo’s sudden change of heart is likely to deepen these suspicions. (Kazuki Nagoya, Deputy Editor, Diamond Editorial Department) 

Toyo proposed to break off partnership with Infroneer 'Mystery' of Toyo’s acceptance of Infroneer’s takeover offer immediately thereafter

New revelations emerged regarding the takeover bid (“TOB”) for Toyo, a marine civil engineering company, by Infroneer, a second-tier general contractor that owns Maeda Construction Co., last year.

 The newly revealed fact is that Toyo had made an offer to Infroneer, requesting Infroneer to sell to Toyo in a buyback the 20% stake Infroneer held in Toyo. Toyo’s buyback offer came after Infroneer made the takeover offer. Despite this, Toyo shortly thereafter accepted Infroneer’s offer.

 Before we get into the details, let's take a look back at what has happened thus far. In March last year, Infroneer proposed a TOB to Toyo on the premise of taking Toyo private. Toyo agreed to the TOB and decided to be acquired and taken private by Infroneer.

 Enter YFO, the asset management company of the founding family of Nintendo. YFO's stake in Toyo, acquired in the market, reached nearly 30%.

 In May of the same year, YFO formally proposed to take Toyo private by means of a TOB premised on good faith discussions. YFO’s TOB price was set at 1000 yen per share, well above Infroneer’s 770 yen per share offer.

 In the end, YFO's intervention resulted in Infroneer’s TOB failing. Subsequently, YFO and Toyo met to hold discussions on multiple occasions but failed to reach an agreement.

 Toyo made arguments such as that going private would jeopardize Toyo’s survival, while YFO complained that Toyo would not proceed to specific discussions.

 Earlier this year, YFO decided to make a shareholder proposal to Toyo. Toyo and YFO will face off at Toyo’s annual shareholders meeting in late June (See "Nintendo founder's fund to submit shareholder propsal at Toyo Construction’s June shareholders meeting, requesting to select new directors").

 As the conflict between the two companies intensifies, the existence of a secret agreement has emerged as a point of contention. The alleged secret agreement involved an agreement between Toyo executives and Infroneer at the time of Infroneer’s TOB, where Toyo executives obtained informal promises from Infroneer to become directors of Infroneer after the acquisition.

 YFO commented regarding the failure by Toyo to disclose this secret agreement that: "This is an intentional failure to disclose. It is extremely problematic from a corporate governance perspective," and in addition criticized Toyo by stating "A Toyo Construction board member, who is said to have entered into a secret agreement, took the lead in approving Infroneer’s TOB, undermining the interests of ordinary shareholders."

 The Diamond editorial department has obtained a memo that hints at the existence of a secret agreement, and has released the contents in full (See "We obtained memo evidencing a "secret agreement" in Infroneer’s TOB for Toyo Construction! Suspicions deepen in conflict with Nintendo's founders").

 The new revelations are likely to deepen suspicions that there was a secret agreement. On the next page, we reveal details of Toyo’s "puzzling" response, accepting Infroneer’s takeover offer immediately after it proposed to dissolve its capital partnership with Infroneer. In addition, we explain the legal risks involved in Toyo’s series of moves.

 Offered to buy at a premium In one week, changed policy and consented to TOB

A party related to Toyo revealed that "Last year we made an offer to Infroneer to ask Infroneer to let us buy back the shares it held in Toyo,"

 According to the source, Toyo President Kyoji Takezawa proposed having Infroneer sell its stake in Toyo to Toyo in a buyback in early February last year. Under the proposal, a premium would have been added to the buyback price.

In 2003, Maeda Construction, now a wholly owned subsidiary of Infroneer, invested about 20% in Toyo, making it an equity method affiliate company. In other words, Toyo’s proposal was to dissolve the capital partnership between Toyo and Infroneer.

 The party related to Toyo said, "options other than a stock buyback, such as an MBO (management buyback) or relying on a friendly shareholder, a White Knight, were being considered too" inside Toyo before and after Infroneer’s proposal. In the end, a stock buyback appears to have been adopted as the most realistic option.

 But Toyo quickly backed down. Within a week of the proposal, management gave up on buying back the stake from Infroneer, the source said.

 The problem is the timing.

 According to the tender offer statement that Infroneer disclosed during Toyo's TOB, Infroneer made an initial offer to buy Toyo on January 26 last year.

 In other words, Toyo proposed to have Infroneer sell its stake in Toyo to Toyo in a buyback immediately after Infroneer initially proposed the takeover offer.

 However, this background was never mentioned in Toyo’s statement of opinion. Under the Financial Instruments and Exchange Act, companies that receive a proposal for a TOB are required to include information such as "the process that led to the decision" in a statement of opinion disclosing their approval or rejection of the proposal.

 In this case, the fact that Toyo was moving to dissolve its capital alliance with Infroneer could also be an important decision point for Toyo’s shareholders in considering whether to tender into the TOB.

 Therefore, there is a risk that Toyo’s failure to disclose these facts could be found to have obstructed investors' proper judgment.

Was the "secret agreement" behind Toyo’s change of heart? Board positions demanded during merger talks…

 Most puzzling of all is that Toyo proposed to dissolve its capital alliance with Infroneer but gave up after only about a week. Consenting to Infroneer’s takeover offer is the exact opposite of terminating the alliance.

 Suspicion of a secret agreement is likely to be deepened by the fact that over the course of just a few weeks, Toyo’s decisions changed over and over. Toyo’s management is believed to have consented to the acquisition in return for a secret agreement that, after the acquisition, Toyo’s management would secure board positions, etc. at Infroneer.

 In the first place, Toyo participated in negotiations to join the group in 2021, before Infroneer (with Maeda Construction and other companies as main players) was founded, but Toyo ultimately decided not to join the group. At the time, Toyo executives sought board positions, etc., but were turned down, another source has said.

 If there was a secret agreement this time, it would mean that Toyo executives secured better terms, in terms of positions, than they did during the previous negotiations. Toyo’s rapid change of stance could be said to deepen suspicions of a secret agreement.

 Toyo passed a resolution at its board meeting on the 24th of this month opposing a takeover bid by YFO. The company also announced a personnel plan that would have Takezawa step down and promote Toju Obayashi as his successor.

 The formal opposition has set the stage for Toyo and YFO to have an all-out battle at the shareholders meeting in late June. The standoff appears to be in a quagmire, as a legal battle between the two sides continues over the convening of an extraordinary shareholders meeting requested by YFO to investigate secret agreements and other matters.