Our Thoughts and Response to the “Notice Concerning the Establishment of a Special Committee” by Toyo Construction Co., Ltd.

Toyo Construction Co., Ltd. (“Toyo”; TSE ticker: 1890) issued a press release titled “Notice Concerning the Establishment of a Special Committee” on February 15, 2023. Below please find our thoughts on this press release.

1. The special committee is merely governance-friendly window dressing for Toyo’s baseless rejection of our acquisition proposal.  The committee will undoubtedly arrive at management’s predetermined rejection of our acquisition proposal.

When Infroneer Holdings Co., Ltd (“Infroneer”) made its tender offer (the “Infroneer Tender Offer”) Toyo established a special committee on February 24, 2022 – before Infroneer issued its formal letter of intent on March 2, 2022. The special committee approved the Infroneer Tender Offer after only 13 business days. In contrast, over 270 days have passed since we made our initial acquisition proposal on May 18, 2022, and no special committee was established despite our repeated requests. 

In the course of our discussions, Toyo has constantly asserted that “if Toyo is taken private by a company other than a maritime construction company, which is in the marine civil engineering business, Toyo will become unable to receive orders for public works projects and Toyo’s business will cease to be viable” (the “Foundation Collapse Theory”).  This assertion is groundless, as demonstrated by Toyo’s approval of the Infroneer Tender Offer, despite the fact that Infroneer itself is not a maritime construction company.  On November 25, 2022, President and CEO Ryoji Takezawa of Toyo delivered a letter to us concluding that Toyo “cannot agree” with our proposed acquisition of Toyo, which letter was sent without any engagement or review from the Toyo board. Moreover, Toyo’s executives explained that they plan to lie to their shareholders.  Toyo’s executives said that they cannot disclose “that kind of reason [the Foundation Collapse Theory] as the reason for disapproval or opposition, so we must make up some ‘other reason’ for opposition and disclose it,” and “we have it work on it, but we have to disclose a reason that can be shared externally.” 

Throughout the 270 days since our May 18, 2022 acquisition proposal, after 20+ conversations that lasted for 40+ hours, Toyo continuously maintained that “as long as [YFO]’s proposal is based on going private, we cannot advance our discussions, and for that reason we shall not discuss measures to improve corporate value.”  They did not establish a special committee until now. 

After rejecting our proposal and concluding that the detailed corporate value improvement measures we already proposed was inadequate suddenly (a matter that should have been decided by a special committee), Toyo’s establishment of a special committee at this late stage, when we pointed out Toyo’s governance failings, is suspicious at best and disingenuous at worst.  We believe the special committee was established to, and will, come to a predetermined conclusion – a governance-friendly window dressing for Toyo’s baseless rejection of our acquisition proposal.

2. The special committee’s membership alone demonstrates that it will be far from impartial – the committee consists of the same people who approved the poison pill adopted to stymie our acquisition proposal in 2022. The committee’s specific mandate facilitates arbitrary judgment, including by excluding consideration of the sole reason Toyo provided for rejecting our proposal.

The composition of the special committee (Yoshio Fukuda, Yutaka Yoshida, Yasuyuki Fujitani and lawyer Tsuyoshi Nishimoto) is substantially the same as the members of the Toyo board who adopted a poison pill to thwart our acquisition proposal, although our proposal was clearly superior to the board-approved Infroneer Tender Offer.  The individuals who are now tasked with “independent” review of our acquisition proposal previously stated that it was ‘not unreasonable’ to maintain support for the Infroneer Tender Offer, in spite of our superior 1,000 JPY acquisition proposal.  Needless to say, given the history of its members, this special committee is not trustworthy and will not be able to independently judge whether our acquisition proposal is fair or in the best interests of Toyo shareholders.

Further, the outside board members on the special committee, Yoshio Fukuda, Yutaka Yoshida and Yasuyuki Fujitani, failed to fulfill their responsibilities as outside directors of Toyo.  These special committee members did not implement any board-led or independent process in response to Toyo management’s inappropriate rejection of our acquisition proposal, and instead ceded the fundamental oversight element of their role as directors to management.  This lack of board involvement persisted even after we notified the board of these failings in a December 9, 2022 letter.

Further, the special committee’s mandate specifically omits a requirement that the committee review and determine the legitimacy of the Foundation Collapse Theory.  Instead, Toyo conveniently tasked the full board with review of the sole reason management provided for rejecting our acquisition proposal.  Toyo offered the abstract excuse that the special committee could not evaluate business matters of corporate value improvements because such review would require “a high degree of specialization and experience because Toyo’s business includes very specialized construction businesses like maritime civil engineering,” so instead it shall be evaluated at the board.  Further, Toyo’s board has only said they will “respect” the details of the judgment of the special committee – when establishing the Infroneer Tender Offer special committee, the board announced that it would “respect as much as possible” the special committee’s judgment.  The Toyo board has thus revealed its intent to retain broad discretion, which together with the above provides further evidence that Toyo’s establishment of this special committee is devoid of meaningful intent to engage with our proposal.

Toyo’s January 23, 2023 letter states unequivocally that growing market share in the maritime construction business is key to increasing Toyo’s corporate value.  Yet, the special committee may not consider our proposals with respect to Toyo’s maritime construction business in its review of our offer.  What is the purpose of a special committee tasked with reviewing an acquisition proposal when such committee specifically lacks the power to review the single reason proffered by management for rejecting the proposal?

 3. We have already provided detailed information to Toyo, which should be more than sufficient for it to fully consider our proposed acquisition

In addition to announcing specific policies and measures to improve corporate value on May 17, 2022, we also provided quantitative analyses to Toyo’s board on July 5, 2022, November 2, 2022, January 18, 2023 and January 24, 2023.  These quantitative analyses were not limited to strategic initiatives for Toyo’s current businesses, but also included a fulsome analysis of the expected impact of strategic measures and value creation plans to address future issues that Toyo will face. In particular, we demonstrated the quantitative differences between our proposed value creation plan and Toyo’s current plan. 

We have already provided Toyo with far more detailed materials and information than is ordinarily provided to target companies as a matter of general practice. In fact, our May 17, 2022 proposals to improve corporate value and subsequent analyses are far more sophisticated and specific than the proposals put forth in the Infroneer Tender Offer, which Toyo’s board endorsed.

Toyo has consistently maintained that “as long as the proposal is based on delisting, we can make no further progress in discussions, and for that reason we shall not discuss measures to improve corporate value.” With this preordained argument, Toyo avoided reviewing our materials and proposals, dismissing our proposal as unacceptable without actually considering it.

We are sending a letter to the Toyo board requesting a rational explanation for why they need further information from us, and in particular, why they are requesting information from us that was not requested from Infroneer.  We also demand that Toyo explain why it waited to establish a special committee for more than 270 days after we submitted our proposal. 

4. Our approach moving forward

If Toyo provides a rational explanation for establishing the special committee that demonstrates that the committee was not established purely to create a superficial pretext to reject our acquisition proposal, we will cooperate with the special committee. However, because of the long delay in establishing the special committee and the limits to the special committee’s mandate, it is clear to us that the Toyo board is not fulfilling its basic duty to shareholders.  Therefore, we remain steadfast in our commitment to reorganize Toyo’s Board of Directors and its Audit & Supervisory Board Members so a refreshed board can properly review all legitimate strategic alternatives to maximize value for all Toyo shareholders.