Poison pill the wrong medicine when shady companies come knocking

Stephen Givens is a corporate lawyer based in Tokyo.

The announcement in August that Tokyo Stock Exchange Second Section listed Asia Development Capital and an affiliated fund had accumulated 32% of First Section listed printing equipment supplier Tokyo Kikai Seisakusho — with the objective of taking control — could not have come at a worse time.

ADC’s murky Chinese ownership and modus operandi tempt a wholesale defensive overreaction that would reverse the progress Japan has made in developing a mature and rational market for corporate control.

Japan’s Financial Services Agency and Tokyo Stock Exchange need urgently to address with utmost discipline and precision the nature of the threat that ADC and its kind present to the market. Responding with a bludgeon, such as the greenlighting of enhanced poison pill defenses, would throw the baby out with the bathwater.

From available information, it is hard to avoid the conclusion that ADC is a fishy operation.

Originally established in 1922 as Nihonbashi Warehouse, in the mid-2000s it morphed into J-Bridge, the listed vehicle for an elaborate securities fraud. In a little over a year, the stock price ballooned from under 100 yen for share to over 2,000 yen per share before collapsing again. The scandal led to multiple arrests and convictions for securities fraud by company officers.

In 2010, J-Bridge came under the control of Sun Hung Kai & Co., a “market leader in personal loans in Hong Kong and mainland China” listed on the Stock Exchange of Hong Kong. ADC’s corporate website openly acknowledges the connection, stating that its mission is “to expand investment opportunities in Asia and Oceania with the comprehensive capital support of the Sun Hung Kai Financial group.”

ADC’s securities report discloses a second Chinese sponsor, Beida Jade Bird Group, the for-profit arm of Peking University. According to Beida Jade’s website, its “main business segments include software, education, media, culture, new energy and real estate, etc. It owns three listed companies and has more than 6000 employees.”

Beida Jade’s connection to ADC appears to have been established by its former chairman, Xu Zhendong, a Communist Party member. Blacklisted by the China Securities Regulatory Commission, Xu resigned from Beida Jade and immigrated to Japan in 2015 to begin a new chapter.

According to the current issue of monthly Japanese news magazine Facta, Xu holds multiple business interests in Japan through a complicated network of intermediary entities and nominees, including ADC.

Beyond the question of who ultimately owns ADC — the people behind the names on the official shareholder register — it is unclear exactly what ADC’s business really consists of, or why it needs to be a listed company in the first place.

ADC’s securities report states that it is an “investment business.” It discloses, without providing detail on underlying substance or results, interests in a Japanese pawnshop business, a licensed Japanese securities dealer, a Malaysian “biomass fuel” company, a Philippine resort and a Japanese restaurant in Fujian province.

Which leads to the obvious question: What on earth is ADC doing trying to take control of a venerable printing equipment company like TKS that supplies some of Japan’s major newspapers? More to the point, what is at stake and what should be done to address legitimate concerns?

The predictable but ultimately self-defeating solution would be to make the Japanese poison pill even more lethal than it already is, ostensibly in order to give executives of target companies enhanced tools to fend off “abusive acquirers.” In other words, corporate raiders who will loot and strip target company assets at the expense of minority shareholders.

The problem with poison pills, enhanced or otherwise, is that they preemptively block changes of control based merely on speculation by a target company’s management that a raider like ADC might, after gaining control, loot the company. Not giving companies like ADC a presumption of innocence before they acquire control gives target management, who are naturally self-interested in maintaining the status quo, license to shut down a healthy market for corporate control altogether.

The answer is not an enhanced poison pill but policing potential buyers after they secure control and punishing — with criminal sanctions — those who do loot. This is a major soft spot in Japanese corporate law and securities regulation. Under current law, a company like ADC would have little to fear if, after acquiring control of TKS, it proceeded to strip out assets under the guise of intercompany transactions.

Policing the fairness of transactions between controlling and controlled companies more effectively would have far-reaching beneficial effects. Not only would it remove incentives for would-be looters to acquire and exploit soft targets, but it would also help correct the market distortions and abuses of the uniquely Japanese listed subsidiary phenomenon.

As the Financial Services Agency and Tokyo Stock Exchange ponder how best to respond to ADC’s bid for TKS, they should focus on potential harm not only to shareholders of TKS — the target company — but to ADC’s remaining general shareholders as well. Given its history, ownership and patchy disclosure, no sane investor would touch ADC.

The best way for the Financial Services Agency and Tokyo Stock Exchange to directly address ADC’s bid for TKS is not an enhanced poison pill, but a thorough investigation of a possible recurrence of the kind of fraud that took place at ADC under its J-Bridge alias.


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