Today, the Yamauchi-No. 10 Family Office (“YFO”) released reference materials to Toyo’s shareholders entitled "Rebuild TOYO: Leadership Requirements for Toyo’s New Board."

Important Disclosure to All Toyo Shareholders: Rebuild TOYO: Leadership Requirements for Toyo’s New Board

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Press Release

 Toyo’s Board finally decided to formally oppose YFO’s acquisition proposal on May 24, 2023, over a year after YFO submitted it on May 18, 2022. Toyo’s Board also released an opinion on June 12, 2023 titled "Views on the Company’s Board of Directors." Toyo’s special committee effectively admitted that YFO’s acquisition proposal was a "serious acquisition proposal" and stated that "we cannot say that this was a non-serious acquisition proposal." Despite that, Toyo’s Board ignored YFO’s acquisition proposal for over a year even though it was their duty to seriously consider the acquisition proposal for the benefit of Toyo’s shareholders. It is also clear that each point Toyo’s Board raised to oppose YFO’s acquisition proposal was guided by the Board’s predetermined strategy of trying to eliminate any counterbids that were inconvenient for them personally, as further described below. Further, although Toyo's board expressed its approval and recommended Infroneer Holdings Inc’s (“Infroneer”) tender offer of JPY 770 per share ("Infroneer Tender Offer"), they stated that the reason they opposed YFO’s JPY 1000 yen per share offer was that the price is insufficient, despite never even attempting to negotiate the price of YFO's offer. This is extremely unreasonable.

 On June 8, 2023, the Ministry of Economy, Trade, and Industry released a draft of its "Draft Guidelines for Corporate Acquisitions" (the "Draft Guidelines"). The actions of Toyo's Board and their stated rationale are also inconsistent with the Draft Guidelines in terms of their duties and roles that a Board should fulfill for shareholders. This clearly shows critical problems in Toyo’s corporate governance.

 YFO believes that Toyo’s current Board’s arbitrary actions and statements are not only hurting Toyo’s shareholders, but also constitute the type of corruption that has set back Japanese capital markets. We believe that revealing these problems will help to remove impediments to desirable acquisitions in Japan’s capital markets.

 Accordingly, YFO is again pointing out major issues and inconsistencies in Toyo's responses in this press release and through the materials "Rebuild TOYO: Leadership Requirements for Toyo’s New Board", which we are using to explain to investors and comprehensively describe Toyo’s governance issues. These materials provide specific examples of various actions that should not be taken by a company’s Board in response to an acquisition proposal because of the negative effects on corporate and shareholder value. This case may be used as a rare lesson to teach what NOT to do as a listed company in Japan in receipt of an acquisition proposal.

1. Problems with Toyo's Response

(1)   Failure to Disclose Structural Conflicts of Interest in Infroneer’s Tender Offer

 Toyo’s Board expressed its approval and recommended that Toyo’s shareholders tender their shares into Infroneer’s Tender Offer for JPY 770 per share only eight business days after Infroneer made the offer. Later, it was reported that Toyo’s executives who led the process of approving and recommending that shareholders tender their shares into Infroneer’s Tender Offer had entered into a secret agreement with Infroneer providing that they would become directors of Infroneer following Infroneer’s Tender Offer. Despite the structural conflicts of interest with Toyo’s ordinary shareholders, Toyo did not disclose any of this information.

(2)   Implementing a Poison Pill without Considering Counterbids

 YFO’s acquisition proposal at JPY 1,000 per share was an all-cash offer to acquire all Toyo shares made as a counterbid to Infroneer’s Tender Offer of JPY 770 per share. The Draft Guidelines emphasize that price terms are particularly important from the perspective of shareholders' interests.  Toyo’s Board should have carefully considered YFO’s acquisitoin proposal and given a proper explanation for their response. However, Toyo’s Board and special committee introduced a poison pill without ever considering YFO’s offer as part of their predetermined strategy of trying to eliminate any counterbids that were inconvenient for them personally, even though Toyo’s special committee has effectively concluded that YFO’s acquisition proposal was a "serious proposal.” This response, which ignored shareholder interests, was not supported by Toyo’s shareholders, and led to the withdrawal of the poison pill proposal the day before Toyo’s 2022 AGM. Despite this, the Toyo Board’s response has not improved.

(3)   A Predetermined Response Based on the "Foundation Collapse Theory"

 From the beginning of our talks, Toyo’s current management took a predetermined approach based on the "Foundation Collapse Theory" that if Toyo were privatized, the foundation of Toyo’s business would collapse. It is now clear that there is no evidence to support such an argument. In addition, it has been reported that Toyo’s management had also considered taking the company private through an MBO as a measure to counter Infroneer’s takeover offer. This clearly demonstrates that there is no reason to believe the "Foundation Collapse Theory" that taking Toyo private would cause it to fail.

It should be noted that the Draft Guidelines state that “Corporate value” is a quantitative concept. The target company management should not make the concept of corporate value unclear by emphasizing qualitative value, which is difficult to measure, nor should the concept of “corporate value” be used as a tool for management to defend themselves (including management referring to retention of employees as an excuse to defend themselves).” This, however, is exactly what Toyo’s management has done. YFO even suspects that the above quoted section of the Draft Guidelines may have been written with this matter in mind.

(4)   Pressure to Withdraw Acquisition Proposal

 In the months that followed, in addition to failing to consider YFO’s “sincere proposal” to acquire Toyo for over 270 days, Toyo’s secretariat and management also repeatedly pressured YFO to withdraw its acquisition proposal. For example, Toyo responded to YFO’s requests for a meeting with Toyo’s president by threatening, "We don’t want to hurt the Yamauchi family or its cherished philanthropic endeavors." Since then, Toyo has been making baseless allegations to weekly and monthly newspapers that YFO has been violating the law. We believe that each of these allegations was a malicious attempt to damage YFO’s reputation and to try to force YFO to give up its acquisitoin proposal.

(5)   Kyoji Takezawa Rejected YFO’s Acquisition Proposal Without Specific Consideration or Decision by Toyo’s Board

 Furthermore, on November 25, 2022, Kyoji Takezawa, Toyo’s current president and representative director, hand-delivered a letter to YFO clearly stating that he could not agree to YFO’s tender offer. He delivered this letter without any formal Board decision, without going through the proper institutional decision processes, and without even establishing a special committee.

(6)   Arbitrary Establishment of Special Committee

 Subsequently, after YFO pointed out Toyo’s governance issues to all of Toyo’s directors and auditors in December 2022, and after YFO announced its new policy to reform Toyo’s Board on January 23, 2023, Toyo hurriedly set up a special committee. However, the composition and establishment of the committee make clear that it was not set up to fairly review YFO’s proposal but just to keep up appearances.

(7)   Endless information requests

 YFO presented a total of 196 pages of measures to increase corporate value that were far more detailed than the information typically required in M&A practice. Nevertheless, Toyo has continued to demand that YFO provide endless information beyond what is required by law, including information that it did not request from Infroneer. This was clearly discriminatory compared with Toyo’s response to Infroneer’s Tender Offer.

 Although the Draft Guidelines state in the context of due diligence that “asking overly detailed questions to an acquiring party as a precondition for engaging in the due diligence process should not be used as a tactic to effectively prevent potential acquisition of management control, and outside directors should provide appropriate supervision from this perspective,” Toyo’s conduct in asking endless questions and seeking information disclosures to prevent a takeover directly corresponds to the behavior the Draft Guidelines aim to prevent, and the outside directors failed to provide any supervision.

(8)   Absence of Negotiations to Increase Price

 In addition, Toyo’s Board has not once approached YFO to attempt to negotiate to raise YFO’s JPY 1,000 per share tender offer price. Despite Toyo’s failure to make efforts to maximize shareholder profits, Toyo concluded that YFO’s tender offer price was insufficient. On the other hand, Toyo has repeatedly argued that YFO’s JPY 1,000 tender offer price is too high, and as a result, coercive. This is an extremely unusual situation in which Toyo’s Board, who should have tried to maximize shareholder profits, have made no attempts to negotiate price. This clearly indicates that their response was predetermined to eliminate YFO’s tender offer regardless of its price. We believe Toyo’s Board should be radically reformed.

2. Objections raised by Toyo’s Board

(1)  Toyo’s Objection that the Execution of its Mid-Term Management Plan Will Lead to the Maximization of Corporate Value and the Common Interests of Shareholders

 As discussed above, Toyo’s Board neglected YFO’s acquisition proposal for over a year, even though Toyo’s special committee was forced to admit that YFO’s acquisition proposal was a "serious proposal." In the meantime, Toyo disclosed a new mid-term management plan (the “New Mid-Term Management Plan”).  Toyo now opposes the acquisition proposal that YFO submitted over a year ago, on the basis of the New Mid-Term Management Plan.

 However, Toyo’s performance has actually been worse than the planned figures for the March 2023 fiscal year as of the time of the JPY 770 per share Infroneer Tender Offer. There are only two substantial differences from the time of the Infroneer Tender Offer, which Toyo’s Board expressed approval of and recommended shareholders tender into, on the grounds that JPY 770 per share could not be realized if Toyo maintained its listing.  First, a mid-term management plan assuming a worse status quo, and second, a dividend plan (with a floor) that sacrifices Toyo’s future financial foundation. While YFO does not reject enhancement of shareholder returns as such, we believe that Toyo’s new dividend policy clearly undermines long-term corporate value, partly because there are past examples of other companies warping management due to dividend policies that commit to setting reckless target amounts in the future being introduced at shareholders' meetings where shareholder proposals for the election of directors were submitted. YFO believes that if Toyo is to enhance shareholder returns, Toyo's Board should opt instead for immediate share buybacks. Especially if the Board is confident that it will grow Toyo’s business through tens of billions in investments, and if the Board really believes that the market is undervaluing Toyo stock, then synergistically promoting future EPS growth through share buybacks is an appropriate capital strategy.

 In addition, the two representative directors who formulated the aforementioned New Mid-Term Management Plan and the two outside directors who have been involved in management supervision are scheduled to retire at the annual general meeting of shareholders in June 2023, but no reason has been given for their retirement, and it is unclear who will take on responsibility.

 It is objectively clear that major doubts surround the feasibility of the New Mid-Term Management Plan, which far from the JPY 770 per share price of Infroneer’s tender offer, which Toyo has failed to achieve, goes so far as to predict the realization of intrinsic value of more than JPY 1,000. Under these circumstances, Toyo’s Board has one-sidedly evaluated YFO’s acquisition proposal as general and abstract, and simply concluding that the New Mid-Term Management Plan is superior to YFO’s acquisition proposal. This can hardly be deemed a fair and objective comparison of YFO’s acquisition proposal and the New Mid-Term Management Plan from a quantitative perspective. We believe that such an evaluation is extremely arbitrary and fraught with major contradictions.

(2)  The Objection that YFO’s Proposed Tender Offer Price (JPY 1,000 per share) is Inadequate and the Offer’s Probability is Uncertain

  Toyo’s Board opposed YFO’s proposed acquisition at JPY 1,000 per share because "the value does not reflect the intrinsic value of our company [Toyo]," despite the fact that the Board declared its approval of, and recommended shareholders tender into Infroneer’s Tender Offer at JPY 770 per share. On this point, it is obvious to everyone that the Board’s stance is self-contradictory and incoherent, even without YFO’s pointing this out.

Toyo's Board supported the Infroneer Tender Offer at JPY 770 per share, recommended that ordinary shareholders tender into the offer, and explained to YFO that "managing Toyo as an independent company without taking it private would make it difficult to achieve a share value exceeding JPY 770 per share within the next few years."

  However, in the continued presence of YFO’s offer of JPY 1,000 per share, the Board made a complete turn around and suddenly said, "We think it's obviously worth more than JPY 1000." This is an admission that Toyo was encouraging its shareholders to tender their shares at JPY 770 per share into Infroneer’s tender offer, but in actuality were trying to sacrifice ordinary shareholders by inducing them to sell their shares to Infroneer at an unreasonably low price. This is nothing less than a clear betrayal of shareholders.

It is also grossly unreasonable for Toyo’s Board to claim that inadequate price is the reason for opposing YFO’s acquisition proposal, despite letting more than a year pass while never once attempting to negotiate a higher price. The Board’s judgment can hardly be said to be based on sincere consideration and negotiation of YFO’s acquisition proposal. Toyo’s Board has not taken accountability from the perspective of shareholders' interests.

(3)  Regarding Toyo’s Allegations that YFO has Violated Laws and Regulations

 Toyo has fabricated "suspicions" that YFO has violated laws and regulations, and Toyo’s Board has cited this allegation as one of its reasons for opposition. However, as YFO has repeatedly disclosed to shareholders, the "suspicion" of violation of laws and regulations alleged by Toyo is factually baseless. YFO has complied with all applicable laws and regulations. As necessary, YFO handles compliance by disclosing information in advance to relevant authorities, and naturally we have not received any indication of violations of laws or regulations from anyone other than Toyo’s current management.

 Raising "suspicion" that a party proposing a takeover has violated the Financial Instruments and Exchange Act, the Foreign Exchange Act, or other laws and regulations, manipulating people’s impressions as if YFO has violated laws and regulations, and then citing this as a reason for the board’s opposition to the proposed takeover, is a “nitpicking” technique often used by target company management to eliminate a potential takeover bidder whom management deems inconvenient.

 On the other hand, regarding Infroneer’s proposed takeover, which Toyo expressed its approval of and recommended shareholders tender their shares into, it has become clear that actual violations of laws and regulations were committed on multiple occasions, in addition to violations of the Financial Instruments and Exchange Act (insider trading) by executives during the reorganization of related group companies in the past. Nevertheless, Toyo made no mention of this point in its opinion statements, etc., and in a mere 8 business days after Infroneer presented the tender offer price, Toyo’s Board expressed its approval and recommended accepting the offer.

Thus, there is a clear contradiction in Toyo’s Board’s dissenting opinion. Moreover, drawing the conclusion that Toyo’s corporate value is highly likely to be damaged by the proposed acquisition by YFO—based on the completely false premise that there exists "suspicion" of violation of laws and regulations, which has no factual basis in the first place—is clearly an extremely arbitrary and unjust assessment, and a predetermined conclusion designed to eliminate any competing proposal inconvenient to Toyo’s Board.

3. Toyo’s Proposed Candidates for New Directors are Unlikely to Improve Toyo’s Critical Governance Issues

 As described above, even if we consider only some of the issues with Toyo's response and reasons for opposition, they are rife with contradictions from the shareholders’ point of view. Further Toyo’s Board unanimously approved these responses and reasons for opposition, so it is clear that Toyo's current governance is seriously problematic. If these critical governance issues are not resolved, Toyo's Board cannot be expected to be properly motivated to truly maximize corporate and shareholder value and to act on behalf of shareholders.

 In addition, Toyo’s proposed candidates for new directors have been nominated by the Nomination and Compensation Committee, which consists only of current directors who have the governance issues described above, and the candidates have clearly inherited the problems of the current directors. Unless the candidates for directors proposed by YFO constitute a majority of Toyo’s Board and Toyo’s broken governance is fixed, it is unlikely that Toyo will seriously consider YFO’s takeover proposal or any other competing proposal in accordance with Draft Guidelines.

 In order to maximize corporate and shareholder value by fixing broken governance and upgrading Toyo’s management, we request Toyo’s shareholders to vote in favor of YFO’s proposals for the appointment of directors and the appointment of auditors.

For further information, please contact:
Public Relations Department 
PR Agent: Vox Global Japan Co., Ltd. 
Tel: +81-3-6204-4337 Tanabe/Kuhara
Email: yfo.inquiry@voxglobalasia.com 

Shareholder Contact: Innisfree M&A Incorporated 
Tel: +1-412-232-3651 (Shareholder Contact - English)
Tel: +44-7506-004-047, +1-212-750-5833  (Financial Institutions and Institutional Investor Contact - English)