Nintendo founding family’s fund moves ahead toward a shareholder proposal for Toyo Construction, requests the election of directors at the shareholders meeting in June

The Diamond Editorial Department has learned that Yamauchi-No.10 Family Office (YFO), the asset management company of Nintendo's founding family, decided to make a shareholder proposal to Toyo Construction, a marine engineering company. At the shareholders meeting in June, YFO will request the election of director candidates. Although YFO proposed in May 2022 to Toyo Construction to take its shares private through a takeover bid (TOB), talks with the company's management have been difficult. What does YFO seek to achieve by making a shareholder proposal at this time? (Kazuki Nagoya, Deputy Editor-in-Chief, Diamond Editorial Department)

The Nintendo Founder's Fund to make a shareholder proposal
Requesting the election of directors recommended by the fund

Yamauchi-No.10 Family Office (YFO), the asset management company of the founder of Nintendo, will announce as early as January 23 that it has decided to make a shareholder proposal to Toyo Construction, the third largest company in the maritime civil engineering industry.

YFO will seek the election of its nominees for the Board of Directors. Details of the shareholder proposal, including the names of the specific candidates, will be disclosed in the future. A proxy fight is expected to take place ahead of Toyo Construction's annual shareholders meeting to be held in June 2023.

YFO was founded in 2020 by Banjo Yamauchi, with assets inherited from his deceased grandfather Hiroshi Yamauchi, who grew Nintendo into a global company. The amount of assets under management exceeds 100 billion yen, and the company is actively investing in startups and operating companies.

We look back on the history of the battle between YFO and Toyo Construction. It all started about a year ago. In March 2022, Infroneer Holdings (HD), which owns Maeda Corporation, a sub-major general contractor, launched a takeover bid (TOB) with the aim of making Toyo Construction a wholly owned subsidiary. Toyo Construction also agreed with the TOB.

YFO jumped into the middle of that. During Infroneer's takeover period, it bought up Toyo Construction's shares and became the largest shareholder with a stake of about 27 percent. In May 2022, YFO officially proposed a TOB to Toyo Construction. The TOB price was 1,000 yen per share, much higher than Infroneer's 770 yen per share. "We highly evaluated the potential of Toyo Construction." YFO’s Chief Investment Officer Hirowaka Murakami said in a June interview with the Diamond Editorial Department (see previous Diamond article "Nintendo's Founding Family's Fund Executives Speak for the first Time in Toyo Construction's TOB" 任天堂創業家のファンド幹部が東洋建設TOBの理由を初激白「潜在力を高く評価」 | Diamond Premium News | ダイヤモンド・オンライン).

After receiving the proposal, the Board of Directors of Toyo Construction decided to introduce a poison pill in late May, demonstrating a definitive stance of opposition. However, the pill proposed was withdrawn a day before the shareholders meeting in June 2022. This was because many institutional investors were expected to oppose the measure, viewing it as an "improper takeover defense measures."

On the other hand, YFO showed an openness to compromise. YFO has announced that it will not conduct the TOB unless the Board of Directors of Toyo Construction endorses it. YFO also submitted a pledge not to buy more shares without the company's prior consent. In fact, YFO has not bought Toyo Construction shares since then.

In August 2022, a confidentiality agreement was signed between the Board of Directors of Toyo Construction and YFO. This agreement was for the two sides to discuss measures to increase the corporate value of Toyo Construction.

Talks seem to have been held quite a number of times. However, the Board of Directors did not provide its consent, a condition precedent to YFO's launch of the TOB. Accordingly, the launch date of the TOB, originally planned for the end of June 2022, has been repeatedly postponed.

So, why did YFO, which expressed its intention to have thorough discussions, decided to start a proxy fight? On the next page, we will explain why YFO is making a shareholder proposal and what it aims to achieve with it.

In addition, it is extremely unusual to have a "forewarning type" of shareholder proposal where there is a time delay before a formal shareholder proposal is made. It is expected that shareholder composition will be affected. It will show what YFO's shareholder proposal might look like and predict the outcome of the proxy fight.

Toyo Construction “the foundation of our business will be destroyed by an Acquisition”
YFO "This claim has no objective basis"

It can be said that YFO's decision to go ahead with a shareholder proposal emerges from a feeling of doubt/distrust of Toyo Construction's management.

 "If a company other than a maritime civil engineering company takes Toyo Construction private, the business foundation will destroyed and the company's survival will be jeopardized."

According to the background of the talks that were disclosed by YFO in December 2022, Toyo Construction had repeatedly expressed this claim during the talks with YFO.

Toyo Construction, a maritime civil engineering company centered on port works, has more public-sector construction projects than private-sector construction projects in its overall business portfolio. It seems there were concerns that becoming a subsidiary of YFO would reduce the chance of receiving orders for public projects.

However, Infroneer, whose TOB Toyo Construction has supported, is not a maritime civil engineering company. In light of these points, YFO stated, "(Toyo Construction's assertion) has no objective basis. We made suggestions to give the utmost consideration and resolve their concerns, but they did not respond to our concrete proposals with discussions."

According to a person involved, Toyo Construction explained to YFO, "We cannot show any evidence that the company's survival would be in jeopardy, so we have to find another reason [to reject the proposal]."

YFO also appears to have been frustrated by the lack of concrete consideration of Toyo Construction for the proposed acquisition.

In fact, YFO is viewing as an issue the fact that the Board of Directors has not given concrete consideration to the proposed acquisition because "the management of Toyo Construction is insisting on the claim that the company's survival will be jeopardized."

Based on Toyo Construction’s disclosure, the company told YFO in November 2022 that it "did not agree with the TOB" after making it clear that it had not made a decision at its Board of Directors. YFO has criticized this point, saying that it "cannot consider this decision to have been made based on an appropriate process."

Afterwards, YFO ended up postponing the start of the TOB four times due to lack of approval from the Board of Directors. YFO came to view the board as merely “buying time,” including by failing to provide the information necessary to formulate a business.

The timing when YFO decided to make a shareholder proposal is the end of January, which is also the deadline for the fourth extension of YFO’s planned TOB. It is easy to imagine that YFO has come to the conclusion that it can no longer expect a favorable response.

Will YFO aim for board majority?
New shareholders may get involved before the shareholders meeting in June

YFO expects to unveil the specifics of its shareholder proposal by April, but the mainstay of the proposal is the election of directors of its own choosing.

At present, Toyo Construction has a total of 8 board members, including five internal management board members and three outside directors. YFO is coordinating to propose not only external candidates but also internal candidates for directors. While YFO is opposed to the reappointment of President Kyoji Takezawa of Toyo Construction and others, it may be in favor of the reappointment of directors who are well-versed in its core businesses. YFO could also aim to secure a majority of its board members.

The main aim of YFO in replacing Toyo Construction’s board members is to reform its governance. Specifically, the Board of Directors will discuss the proposed acquisition by YFO. In addition to comparing the proposed acquisitions by Infroneer and YFO, any proposed acquisitions by other funds or operating companies will be included in the scope of consideration, while ensuring the independence of the directors.

It is extremely unusual for shareholders to announce a proposal policy ahead of a formal shareholder proposal. The voting rights of Toyo Construction at its June shareholders meeting are scheduled to be vested at the end of March. In other words, the shareholders will change and the stock will be traded on the basis that YFO's shareholder proposal will be made.

Looking at the shareholder ledger of Toyo Construction, the largest shareholder of Toyo Construction is YFO, which holds 27 percent, but Infroneer, whose takeover bid failed, holds 20 percent, and Toyo Construction's Employee Shareholding Association also holds 3 percent.

YFO, which has submitted a pledge, cannot buy more shares, but there is a good chance that new funds and companies will speculatively enter the market and buy shares. The battle between YFO and Toyo Construction is likely to be tumultuous.