Toshiba in Limbo as Shareholders Reject Proposals to Split or Consider Sale

By BLOOMBERG

Toshiba Corp. shareholders rejected proposals for the firm’s future from both management and activist shareholders, putting the 146-year-old Japanese conglomerate in a state of limbo after months of wrangling about its next steps.

A proposal to split the company in two, put forward by management, failed to get the simple majority it needed to be approved. A separate proposal by second-largest shareholder 3D Investment Partners Pte. to reconsider alternative options including a sale was also voted down at a meeting of shareholders in Tokyo on Thursday. 

While the votes are purely advisory and not legally binding, the failure of both proposals underlines the division among shareholders and management over the best course of action for the troubled firm. It’s not immediately certain what steps the company will take from here.

Toshiba shares erased gains and fell as much as 5.1% in the afternoon session in Tokyo following the vote. 

The Japanese company may continue with plans for the two-way split despite the defeat, ahead of a binding vote next year. Chief Executive Officer Taro Shimada said on Thursday that the firm would consider all options to improve corporate value. 

Last month, Satoshi Tsunakawa, the former CEO who crafted the proposed split plan, said Toshiba may make adjustments to its proposal if it failed to gain majority shareholder support. The company has already changed the plan once, moving from a three-way to two-way split last month.

“It will be back to the drawing board,” Mio Kato, an analyst at LightStream Research, said before the vote on the possibility of both proposals being rejected. “I think there will be a lot more jawboning and more aggressive demands of management.”

Toshiba has been locked in a battle with hedge funds and activist shareholders over the future of one of Japan’s iconic companies, with the funds arguing the conglomerate should be sold to private equity, an idea that Toshiba’s management rejects. Instead, the company proposed spinning off its device unit while selling non-core business units in areas such as elevators and lighting.

In an interview with Bloomberg last month, former CEO Tsunakawa said the risks of going private were impossible to ignore. Tsunakawa said Toshiba would lose orders from public entities ranging from utilities to local governments if it went private through a sale to a fund, depriving it of an important source of cash flow. On top of that, the company would be forced to sell sensitive technology operations in areas such as nuclear, defense and cybersecurity, all of which are essential to its sustainable growth, he said.

Some argue that Toshiba’s battle with its activist investors is a test case for how Japan Inc. functions with shareholder capitalists in the country’s $6 trillion stock market.

Rarely has there been such opposition to a company’s plan.

Effissimo Capital Management Pte., the largest shareholder with a roughly 10% stake, spoke out against it this month, saying a spinoff would be irreversible and could be detrimental in the longer term. For Farallon Capital Management, another big stock owner, privatization is the best solution and Toshiba should solicit proposals from private equity. 

Two major proxy advisers, Institutional Shareholder Services Inc. and Glass Lewis & Co., both saidclients should vote against the split proposal. Glass Lewis argued the process that led to it relied on “flagrantly dubious reasoning” and sidestepped investor feedback and private equity buyout interest. 

Once one of Japan’s most iconic companies, Toshiba has lurched from one disaster to another over the past seven years, in developments that created a lack of trust between shareholders and management.

It started with an accounting scandal in 2015 that devastated its profits and led to a company-wide restructuring. The subsequent unraveling of a costly foray into nuclear power business in the U.S. led to a $6.3 billion writedown and saw it teeter on the edge of delisting. It was forced to sell its crown jewel memory-chip unit and offer stock that was snapped up by activist investors, giving them an outsized presence on the shareholder register.

When Effissimo sought in 2020 to put one of its co-founders and other candidates on Toshiba’s board, shareholders rejected it. Suspicious about how the vote was conducted, Effissimo proposed that independent investigators be appointed to look into it, winning a landmark shareholder vote last year. The subsequent report by the investigators alleged that Toshiba management worked hand in hand with government allies to sway the outcome, findings that four Toshiba board members described as “deeply disturbing.”