Japanese industrial conglomerate Toshiba Corp.'s general shareholders' meeting last year was not conducted in a fair manner, a group of lawyers concluded Thursday after an investigation requested by some foreign shareholders.
The lawyers said in a report that Toshiba sought assistance from the government in an effort to block proposals from foreign activist investors, taking advantage of a revised law aimed at protecting national security by limiting the influence of overseas shareholders.
The investigation exposed behind-the-scenes collaboration between Toshiba and the government to fend off pressure from activist shareholders, undercutting the conglomerate's efforts to improve governance and transparency since an accounting scandal in 2015.
Toshiba has faced off with foreign activist shareholders like Singapore-based fund Effissimo Capital Management Pte. Ltd. over management and governance.
Questions about the July 2020 shareholders' meeting were raised after revelations that shareholder services provider Sumitomo Mitsui Trust Bank mistakenly omitted some mail-in votes.
Toshiba planned to "prevent" investors such as Effissimo from exercising their rights to make proposals and vote in the general shareholders' meeting in July 2020, the report said.
"We judge that the shareholders' meeting was not run in a fair manner," the lawyers said in the over 100-page report.
The influence of foreign investors has grown in recent years as Toshiba has accepted investment from abroad to overcome its financial struggles following the 2017 bankruptcy of U.S. nuclear plant subsidiary Westinghouse Electric Co.
Effissimo, a major shareholder with an over 10 percent stake in Toshiba, submitted a proposal for the appointment of three outside directors but it did not secure approval at the general shareholders' meeting on July 31, 2020.
Leading up to the meeting, Toshiba, in cooperation with the industry ministry, urged Effissimo to drop the proposal -- a potentially illegal act.
The Japanese company's actions "directly or indirectly had an undue influence on shareholders," the lawyers said.
According to the report, it is "presumed" that then Toshiba CEO Nobuaki Kurumatani met with then Chief Cabinet Secretary Yoshihide Suga, who is now Japan's prime minister, over breakfast to explain Toshiba's situation regarding foreign investors.
Kurumatani implicitly admitted that he had attended the breakfast but said in an interview conducted by the lawyers that he had no recollection of a "position document" compiled by a Toshiba executive, the report said.
The document stated that urgent and strong government support was required to ensure that the revised Foreign Exchange and Foreign Trade Control Law would be applied effectively.
"If we push hard, we can catch them with the foreign exchange thing, right?" Suga was quoted as telling Toshiba executive Masaharu Kamo during the breakfast meeting on July 27 last year.
At the general shareholders' meeting a few days later, support for Kurumatani dwindled to 57.96 percent from 99.43 percent a year earlier.
When asked about his meeting with Kurumatani, Suga told reporters, "I'm not aware of it at all. It didn't happen."
Toshiba said in a statement in English it "will carefully review this investigation report and plans to announce its comments towards this investigation result at a later date."
The Ministry of Economy, Trade and Industry said only that it is examining the content of the report.
Speaking in a press briefing, one of the lawyers involved in the investigation, Takao Nakamura, said "the norms of corporate governance were ignored."
Toshiba is among the Japanese companies viewed as important on national security grounds as the conglomerate's businesses include defense equipment, infrastructure and nuclear power.
"Based on the materials we have, among activist investors, Effissimo appeared to be treated like an enemy (of Toshiba), but it was not concerned with security issues related to the Fukushima nuclear power plant or defense or semiconductors," Nakamura said.
"Under unusual circumstances like the pandemic, it is of great interest to the industry ministry to ensure stability at a company like Toshiba, which has a huge influence on society, and the industry ministry wanted to prevent shareholders' proposals from undermining such stability," the lawyer said.
Another foreign investor, Harvard Management Co., an endowment manager of Harvard University, was reportedly pressured by an adviser to the Japanese ministry not to exercise its rights at the July shareholders' meeting.
The investigation said Toshiba had devised a plan to achieve that goal with undue influence and effectively asked the adviser to negotiate with the investor.
The probe was conducted after the approval at an extraordinary meeting in March of a proposal by Effissimo calling for a fresh investigation into whether the July 2020 shareholders' meeting was conducted fairly. The development was seen as a rare victory for shareholder activism.
Kurumatani abruptly stepped down in April amid a management rift over a proposal by British private equity firm CVC Capital Partners to take Toshiba private.
The plan, seen as an attempt to shield Toshiba from growing activist shareholder pressure, sparked speculation that Kurumatani, who previously served as head of CVC's Japan unit, had sought to protect himself.
Toshiba's general shareholders' meeting is slated for June 25.