TOKYO—Global investors including
have identified Japan as a market packed with undervalued companies. But a recent case in which management used a poison pill to stop an aggressive share buyer—with the Supreme Court’s endorsement—shows why newcomers have a tough time unlocking Tokyo’s opportunities.
The case involves the company that built Japan’s first domestically made rotary printing press in 1906. More than a century later,
, whose name means “machine manufacturing,” still focuses on making machines that print newspapers. Not surprisingly, it is struggling.
This year an investment company led by Anselm Wong, a Malaysian resident of Japan, built up a stake of nearly 40% in Tokyo Kikai, saying it needed a shake-up for the digital age. Management fought back, describing Mr. Wong as a threat to the company’s value.
In October, Tokyo Kikai shareholders, minus Mr. Wong’s company, approved a poison-pill defense that allowed management to dilute Mr. Wong’s stake and prevent him from gaining control. He battled to Japan’s Supreme Court, which in November ruled that the poison pill was justified.
Defeated for now, Mr. Wong has pledged to reduce his holdings and not try for a controlling stake. The company isn’t implementing the pill defense for now. Still, Mr. Wong plans to keep 32.7% of Tokyo Kikai and push for change.
“I still don’t understand why we are being penalized for buying shares in the free market,” Mr. Wong said. “Are they trying to send a message to foreign investors that if you come to our country, you can’t control our companies?”
Tokyo Kikai praised the Supreme Court’s ruling. Its lawyer said the court was correct in identifying Mr. Wong’s company as an “aggressive interloper” against which Tokyo Kikai was entitled to defend itself. The goal of Mr. Wong’s side was “very vague and based on such lack of transparency that we were quite worried about their true aim,” said lawyer Yo Ota.
Proxy advice firm Glass Lewis, which typically frowns on poison pills, backed management in this case. It cited the Tokyo Stock Exchange’s finding that Mr. Wong’s company,
, had falsified its books for years. Mr. Wong said the problems occurred under previous management and he cleaned them up.
Tokyo Kikai focuses on making machines that print newspapers.
People on both sides of the issue said the case exposed murky rules governing change of control at Japanese companies, which in practice means that the winner of disputes is often the party seen as sympathetic by judges and government officials.
“Whatever little logic in Japanese takeover defenses, this case has rendered it a mess,” said Nicholas Benes, who leads an institute that trains independent directors at Japanese companies. If management dislikes someone, he said, “then you can kick them out of a shareholder meeting, which runs completely against the law about treating every shareholder equally.”
While Tokyo Kikai is a relative minnow on the stock market, with a value of less than $100 million, it is an example of the kind of opportunity some global investors see in Japan at a time when the U.S. looks richly valued. More than 1,000 listed companies in Japan have a stock-market value less than their net assets, one signal that a management shake-up might lift the stock price.
Buyout firms such as KKR & Co. and
have been active in Japan in recent years, generally focusing on friendly deals for subsidiaries or assets that big Japanese companies want to unload. Blackstone spent more than $2 billion last year for a consumer-health unit of
And in 2020, Mr.
spent billions of dollars to acquire a 5% stake in five major Japanese trading companies.
But full takeover bids in Japan often run into problems, especially those involving politically sensitive companies such as Tokyo Kikai with its media connections. At most companies, the majority of directors are simultaneously company executives, who have a built-in conflict of interest when a potential acquirer shows up because they want to keep their jobs.
Japan also lacks simple rules such as the one in the U.K. that requires an investor buying 30% or more of a company to mount a takeover bid for the entire company.
CLSA strategist Nicholas Smith said Mr. Wong’s actions would have raised concerns in any global stock market, but he said regulators elsewhere would be better-equipped to respond. Mr. Wong’s company suddenly emerged over the summer as the holder of more than 30% of Tokyo Kikai’s shares, and at one point, the stock skyrocketed to more than 10 times its value at the beginning of the year.
Mr. Smith said regulators had the tools to call a timeout so Mr. Wong’s intentions could be assessed, but failed to use them and forced the courts to step in.
“This is not an attempt to raise the drawbridge on takeover bids, but rather a warning that regulatory agencies will need to act faster and be more involved in regulating markets,” said Mr. Smith. The Financial Services Agency, the main enforcer of securities laws, declined to comment on the Tokyo Kikai case or say whether it exposed any issues worth the agency’s attention.
Mr. Ota, the Tokyo Kikai lawyer, said judges have offered little guidance about what standards should be used to assess potential acquirers. “Japanese courts have been very much reluctant to do such kind of scrutiny, so they just try to depend on the judgment of the shareholder,” he said.
More than 1,000 listed companies in Japan have a stock-market value less than their net assets.
Mr. Wong said his company was a legitimate investor like any other trying to unlock value, and he said the printing-press maker needed to move beyond manufacturing machines.
“They should utilize their relationship with the media and try to shift to a digital marketing business because the paper market is shrinking,” he said. “But their focus is on the product rather than the needs of the customer.”
Write to Suryatapa Bhattacharya at Suryatapa.Bhattacharya@wsj.com
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