Complete picture of the "blank 250 days" revealed—Nintendo founding family versus Toyo Construction: Extraordinarily long-term battle over buyout proposal

December 5, 2022. This was a chilly day with drizzling rain. On the 11th floor of an office building in Jimbocho, Tokyo, two men confronted each other in a meeting room of the headquarters of Toyo, a major maritime civil engineering company.

One is Banjo Yamauchi, representative of Yamauchi-No.10 Family Office (YFO), the asset management company of the founding family of Nintendo. He is a grandson of Hiroshi Yamauchi, known as the originator of Nintendo's revival. The other man was Kyoji Takezawa, CEO of Toyo. He is a veteran in the sales section of Toyo’s construction business.

YFO began acquiring Toyo shares from around March 2022 and became the largest shareholder with more than 27 percent of the shares as of May 2022. On May 18, 2022, it made a "friendly" acquisition proposal to Toyo on the condition precedent of an agreement with Toyo’s management. YFO offered a price of 1,000 yen per share to make Toyo a wholly owned subsidiary.

While YFO typically invests in startups with advanced technologies, it also focuses on activities that encourage the transformation of old-fashioned "legacy industry" companies.

Complete breakdown of negotiations at the meeting on December 5, 2022

Since the acquisition proposal, the two companies had discussions 20 times and more than 40 hours during the 250-day period. Initial discussions were at the working level. However, differences of opinions over the proposed acquisition were not resolved, and the discussions had been shifted to be held between the top management (representative and CEO) of the two companies since October.

December 5, 2022 was when the fifth top meeting was held. The meeting, however, was not a gentleman-like exchange with the parties listening to each other’s stories carefully like how the past meetings were. Banjo, in response to an informal letter presented in advance by Toyo stating, "We cannot agree with the proposal to acquire all of the shares," stated confusedly, "What do you mean that you don't accept our proposal?" "(Toyo) has no effective governance in place." In the end, Banjo left his seat early and the meeting ended in a short time of about 30 minutes.

The two companies’ negotiation completely broke down and the December 5 meeting. YFO announced on January 23, 2023 that it will oppose the re-election of three directors, including the CEO, Mr. Takezawa, at Toyo's annual meeting of shareholders to be held in June 2023, and that it will propose its own director candidates.

Although the two companies continued with 250 days of unusually long discussions, the parties were in fact never on the same wavelength from start to finish.

In an interview with Toyo Keizai in June 2022, Takahiro Yabushita, Representative Director and Senior Managing Executive Officer of Toyo, said “We are not ready for a discussion yet. We should first create an environment for starting a discussion." The talks did not move any further from that point.

Details of the five meetings

The first meeting seems to have been simply confirming the circumstances thus far. In the second meeting, Mr. Takezawa spent time explaining to Banjo the unique structure of the industry, such as the construction industry and the situation of the maritime civil engineering business. It was the third meeting that had a significant change to the situation.

"What is your opinion on the acquisition proposal?" Banjo started off by asking this. Takezawa said that he could not make a decision through a third-party committee or a board of directors meeting (partly due to the lack of time). Banjo responded that it does not have to be a formal proposal following formal processes, but he would like a written response, even just with Takezawa’s feelings in it.

The letter Takezawa handed to Banjo in response to this request was the document explained above, which stated, "We cannot agree with your proposal to acquire all shares.” By this letter, Toyo responded with a "no" to the acquisition proposal, albeit an informal one. However, in lieu of the privatization that YFO had planned, the letter offered a different proposal, "finding a different path through discussion while maintaining the public listing." "The content was in line with YFO's intentions," said a representative of Toyo.

"Toyo probably wanted to ask YFO for further cooperation in the form of a debt (lender of funds) and not equity (stock)," speculated an industry-representative familiar with Toyo.

As a result, this document provoked YFO's anger. As mentioned earlier, Banjo left his seat early in the fifth meeting, the "December 5 meeting."

YFO then made a press release on January 23, 2023, titled "Critical Issues in Corporate Governance," in which Toyo’s letter was referred to as "a letter of disapproval" and criticized that "Toyo did not consider the acquisition proposal for a period of 250 days. The decision-making process is extremely inappropriate for a listed company, in which letters are issued without going through a review process by a special committee or institutional decision-making by the board of directors" (partially edited).

A representative of Toyo, who said with disappointment, "At first, YFO was not concerned about the fact that the letter was not issued through an institutional decision-making process. It may have changed its strategy to point out poor governance from the middle of the process. Communication did not go well."

The talks ended with no mutual agreement at all. Looking back, it could be said that it was a "blank 250 days" that ended in unproductive discussions.

Criticism – "a tactic to not discuss seriously"

YFO is distrustful of the Toyo’s series of actions. "Toyo had a tactic of 'not allowing entry from the entrance' (no serious discussion to be had). Moreover, it insisted on the “Foundation Collapse Theory,” meaning that, if a company that is not a maritime civil engineering company were to acquire Toyo and made it private, it would become unable to win public works projects," said a representative of YFO.

This YFO representative went on even more strongly and said, "Toyo might have assumed that if they threaten us a little, we would disappear. I have no choice but to believe so because of the way Toyo insisted on its Foundation Collapse Theory and stopped our discussions."

Being unable to shake off this distrust of management, YFO intends to submit a shareholder proposal against the reappointment of Takezawa and others, but it is unclear whether the majority of shareholders will agree.

Some overseas funds that invest in Toyo seem to be dissatisfied, saying, "Toyo has not considered the acquisition proposal even though YFO has made a good offer of buying Toyo shares at 1,000 yen per share." However, the main view of many within the industry is that “it would be difficult to get a majority of support," said an executive at a major maritime civil engineering company. Since YFO’s plan is to acquire 100% of Toyo shares, it is hard to imagine that it would collaborate with foreign investors for a proxy fight.

Alternatively, there is a possibility that, regardless of Toyo’s intention, YFO proceeds with a TOB after the annual meeting of shareholders. YFO's asset size is known to be 200 billion yen, so it has ample financial power.

However, YFO has extended the start of the TOB five times (currently, the start of the TOB has been announced to take place in late September 2023). Based on the fact that Maeda Corporation, a second-tier general contractor and Toyo’s capital and business alliance partner, holds a 20% stake in Toyo, “the TOB may end up being unsuccessful (taking into account the circumstances so far), YFO will not likely make a TOB" (comment from a person who is familiar with the internal affairs of Toyo mentioned above).

The same person also said, "Toyo has started its evaluation of the contents of the acquisition proposal." In the future, Toyo may set up a third-party committee and officially announce that it will reject the acquisition proposal prior to the annual meeting of shareholders. The situation remains chaotic, and it appears set to remain so over even a longer period.

YFO repeated its position that Toyo should go private and seriously focus on reform. Toyo, on the other hand, continued to insist that it “could not accept any acquisition proposal so long as it is premised on Toyo’s going private,” and that “YFO should show concrete measures for reform.”

From the beginning, discussions at the working level took place several times. On the YFO side, Mr. Hirowaka Murakami, a childhood friend of Banjo and the chief investment officer of YFO, attended the meetings. From the Toyo side, Mr. Yabushita and others attended.

The gap between the two companies, however, never got closed. Not only did Toyo not try to make a decision at an official meeting such as the board of directors, it did not even start to consider the acquisition proposal.

Frustrated, the two companies sought for a next step. "Let's have a top to top discussion" and "let's escalate this." The two sides agreed to move it to a top management meeting. The working level meetings were never held after October 6, 2022.

With an intention to defuse the situation, a total of five to management meetings have been held so far. The first time was on October 18, 2022; the second on November 2, 2022; the third on November 14, 2022; the fourth on November 25, 2022; and the last on December 5, 2022. All of them were held between Banjo and Mr. Takezawa, the CEO, alone. Even Murakami, the right-hand figure of Banjo, seems to have been asked by Banjo not to attend the meetings. All of the meetings were held in the meeting room at the head office of Toyo.