Toshiba’s three-way split and how it affects its stakeholders

The Japanese conglomerate, Toshiba, made headlines this week with its plan to split the company three-ways. The plan comes as a result of being tarnished with scandals and being badly affected by the 2008 financial crash and the 2011 Fukushima disaster. In 2017 Toshiba came close to collapse and whilst it survived, the company is still very much in financial hardship.

Before plans to split the company into three, the board released new shares in an attempt to rescue the company from financial hardship. Most of the new shares ended up in the hands of activist investors who have defeated the board in shareholder votes.

Whilst the shareholders are demanding either a buyout or radical restructuring, they are unhappy with how the board is negotiating with private equity firms. Shareholders who hold 30% of the share register think the plan is unrealistic and disappointing. Another has said that Toshiba has not run a competitive process and the price would be much higher than what private equity firms are willing to pay.

It seems that private equity firms are not enthusiastic about the spin-offs as the committee has reported that the levels given by private equity firms are “not compelling to relative market expectations.”

It would be beneficial for the board to sit down with the shareholders and work together to achieve the best outcome for everyone. Board members are at risk of being voted out if the shareholders are unhappy with how the plan is being progressed.

What will the shareholders do next?

Toshiba’s shareholders are waiting to see whether the share price increases over the next few weeks and months. It has been reported that if it increases, the board’s proposal will likely be accepted.

It has been reported that the shareholders are not thrilled with the board members. Shareholders Shareholder activism happens when shareholders are not happy with how the board is directing the company. Activist shareholders can gain the power to oust board members.  Usually, the activist shareholders will have a controlling or large stake in the company. However, this is not always the case. For example, Engine No 1 had only 0.02 per cent of ExxonMobil’s shares when it ousted 3 directors for not combating climate change fast enough and replaced them with their own.

Is shareholder activism good or bad?

If the company is performing financially, seeing growth, keeping stakeholders happy and in line with government requirements, there should be no reason to see shareholder activism. Some activists, however, may be power-hungry and simply want more control. This could cause harm to the company and stakeholders.

However, if the executives are doing an okay job but not fulfilling the potential of the company, shareholders might want to modernise the company to minimise the risk of being left behind with the dinosaurs!

N.B the ousted ExxonMobil executives don’t quite believe that Engine No 1 will be able to achieve substantive climate change measures any time soon.  The shift in direction is just too large.

Toshiba is in financial distress – but what does that mean?

Toshiba owes money. Who do they owe money to? Creditors. A company of Toshiba’s size will have multiple creditors and this will likely be a syndicate of banks. As the creditors want their money returned, they will likely be in favour of this restructuring plan. Spinning off parts of a company is usually more profitable than waiting for the company to go into liquidation!

What about Toshiba’s competitors?

As a conglomerate, Toshiba could have a lot of interest from competitors from various industries.  The spin-offs could hold Toshiba’s:

1. Infrastructure, nuclear and heavy engineering operations, and sensitive technology in areas such as AI and quantum computing.
2. An asset management division that would hold Toshiba’s 40% share in Kioxia.
3. Smaller devices and semiconductors

Some of the reasons that competitors might want to acquire one of the new companies are as follows:

• Prevent other competitors from acquiring the company
• Speed to market
• Access to its intellectual property (intangible) and technologies
• The employees
• To acquire “goodwill”
• Could be able to pay less than the company is worth

The buyer should confirm that the deal would not be blocked by anti-trust laws before agreeing to purchase the target company. In the UK, the Competition Market Authority will either okay or block M&A deals.

How is the Japanese government involved?

Businesses will usually always have to consider government agencies and policies when merging and buying or selling another company.

As noted above, one of the spin-offs would hold Toshiba’s infrastructure, nuclear and heavy engineering operations, and sensitive technology in areas such as artificial intelligence (AI) and quantum computing. This would likely fall under the protection of Japan’s tightened Foreign Exchange and Foreign Trade Act.

Also noted above is anti-trust issues. Governments are unwilling to allow one company to hold a monopoly over the market. This is so consumers have choice and to keep a competitive market.

On another government note, this spin-off comes after the Japanese government created a new tax scheme to encourage spin-offs. The scheme is based upon a model used by global conglomerates, such as General Electrics.

Some of the practices areas of a law firm involved in a restructuring and M&A deal are:

• Restructuring and Insolvency (finance and corporate)
• Corporate
• Capital Markets (if the spin-offs are listed)
• Finance
• Tax
• Employment and pension

Article by Stephanie Anais