Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Thematic (Sector/Industry)

On April 28, after the close and just before the long Japanese Golden Week holiday, Toyota announced it would seek shareholder approval to issue 500bn yen of a new class of unlisted shares it called "Model AA Shares" (which have a capital guarantee, transfer restrictions, dividends, and voting rights) to individual investors, and Toyota would buy back the same number of shares from the market. I discussed the issue of these shares in a piece titled <a href="http://www.smartkarma.com/insights/model-aa-shares-good-governance-gone-bad" target="_blank">Good Governance Gone Bad?</a> I allowed for the possibility of misunderstanding in <a href="http://www.smartkarma.com/insights/model-aa-shares-the-possible-counterpoint" target="_blank">The Possible Counterpoint</a>.I see no misunderstanding. These shares are bad for those investors who cannot buy them. They are designed to buy votes, not raise capital.  And the issuance violates Japan's <a href="http://www.fsa.go.jp/en/refer/councils/corporategovernance/20150306-1/01.pdf" target="_blank">Corporate Governance Code</a> both explicitly and implicitly.As the Nikkei <a href="http://asia.nikkei.com/Markets/Equities/US-proxy-adviser-against-proposed-Model-AA-shares" target="_blank">reports</a>, Global shareholder proxy advisor Institutional Shareholder Services (ISS) yesterday came out against the planned Toyota share issue, saying Toyota's explanation is inadequate, and the purpose of the issuance could lead to overly cozy relations between the company and certain shareholders. This refers to other sections of the Corporate Governance Code.CONCLUSIONS:<ul><li>Shareholders should question the financial and 'logical' aspects of this issuance. The issuance is illogical, uneconomic, and unnecessary. </li><li>The proposed issuance violates Japan's <a href="http://www.fsa.go.jp/en/refer/councils/corporategovernance/20150306-1/01.pdf" target="_blank">Corporate Governance Code</a> both explicitly and implicitly.</li><li>And now ISS has come out against it too.</li><li>This needs a 67% vote to pass. Understand the details and make your vote. If you agree with this next month, your future votes will likely lose value.</li><li>Toyota is not offering YOU a put on all your shares. Why should they offer it to someone else?</li></ul>

On April 28, after the close and just before the long Japanese Golden Week holiday, Toyota announced it would seek shareholder approval to issue 500bn yen of a new class of unlisted shares it called "Model AA Shares" (which have a capital guarantee, transfer restrictions, dividends, and voting rights) to individual investors, and Toyota would buy back the same number of shares from the market. I discussed the issue of these shares in a piece titled Good Governance Gone Bad? I allowed for the possibility of misunderstanding in The Possible Counterpoint.I see no misunderstanding. These shares are bad for those investors who cannot buy them. They are designed to buy votes, not raise capital.  And the issuance violates Japan's Corporate Governance Code both explicitly and implicitly.As the Nikkei reports, Global shareholder proxy advisor Institutional Shareholder Services (ISS) yesterday came out against the planned Toyota share issue, saying Toyota's explanation is inadequate, and the purpose of the issuance could lead to overly cozy relations between the company and certain shareholders. This refers to other sections of the Corporate Governance Code.CONCLUSIONS:Shareholders should question the financial and 'logical' aspects of this issuance. The issuance is illogical, uneconomic, and unnecessary. The proposed issuance violates Japan's Corporate Governance Code both explicitly and implicitly.And now ISS has come out against it too.This needs a 67% vote to pass. Understand the details and make your vote. If you agree with this next month, your future votes will likely lose value.Toyota is not offering YOU a put on all your shares. Why should they offer it to someone else? 

TOYOTA UPDATE: ISS Comes Out Against Model AA Shares - So Should You

There are two sides to every story. The Possible Positive Counterpoint to a negative opinion on Toyota's proposed issuance of so-called "Model AA" shares is twofold.&nbsp;<ol><li>It could be that the intentions are highly honourable, but were in fact communicated badly (or not communicated). Toyota has recently been making efforts to attract individual shareholders. They may have decided they need to make a quantum leap. There would be a positive outcome if that were indeed the intention. Details below.</li><li>If a company issues long-term un-trade-able capital, and buys back trade-able capital, it goes without saying that the people who buy want to buy, and the people who sell want to sell. The company is simply proposing to broker the deal. When the buyers cannot re-sell what they bought for a very long time, this removes potential overhang. &nbsp;This aspect is not negative. It is tough to argue otherwise.</li></ol>&nbsp;

There are two sides to every story. The Possible Positive Counterpoint to a negative opinion on Toyota's proposed issuance of so-called "Model AA" shares is twofold.&nbsp;It could be that the intentions are highly honourable, but were in fact communicated badly (or not communicated). Toyota has recently been making efforts to attract individual shareholders. They may have decided they need to make a quantum leap. There would be a positive outcome if that were indeed the intention. Details below.If a company issues long-term un-trade-able capital, and buys back trade-able capital, it goes without saying that the people who buy want to buy, and the people who sell want to sell. The company is simply proposing to broker the deal. When the buyers cannot re-sell what they bought for a very long time, this removes potential overhang. &nbsp;This aspect is not negative. It is tough to argue otherwise.&nbsp;

'Model AA' Shares - The possible counterpoint

After the close on Tuesday April 28, 2015, Toyota <a href="http://www.toyota-global.com/investors/stock_information_ratings/share_2015/pdf/commonstock_20150428_01.pdf" target="_blank">announced</a>&nbsp;the board had resolved to submit to shareholders a resolution to partially amend&nbsp;the company's Articles of Incorporation to allow the company to allow issue a new series of shares, which they have called "Model AA Shares". The announcement noted a first tranche of 500 billion yen, and future tranches.&nbsp;The securities will be unlisted, non-transferable, require buying an embedded put from the company itself, and result in a mini&nbsp;"death spiral" impact on the common shares.&nbsp;My first reaction was "Huh?"After reading all the materials a second, third, and fourth time - in both Japanese and English - given my 15+yrs of looking at the microstructure of Japanese markets, special situations, and unusual security issuances, my reaction has evolved to a more considered, and evolved&nbsp;"Huh?"CONCLUSIONS<ul><li>The explanations do not make a great deal of sense.&nbsp;</li><li>The economics do not make a great deal of sense, nor do they match what should be the desired 'long-term investor' commitment.&nbsp;</li><li>If one looks at the best and highest purpose of such a structure, one must conclude it might be meant for a different purpose than Toyota discloses.</li><li>And if one takes a more skeptical view of Japanese issuance practices, this has to be seen as a slightly bearish development.</li><li>If Toyota is issuing this now as a way to gain acceptance of issuing it to a different group of shareholders than it says, that is bad.</li><li>If Toyota is wasting its time and energy for minimal benefit, that is bad.&nbsp;Toyota does not need to save 34bn yen in dividend payments over 5yrs when they start with 6 trillion yen in cash, and will generate another 10 trillion yen plus in cash over the next 5 years.&nbsp;</li></ul>

After the close on Tuesday April 28, 2015, Toyota announced&nbsp;the board had resolved to submit to shareholders a resolution to partially amend&nbsp;the company's Articles of Incorporation to allow the company to allow issue a new series of shares, which they have called "Model AA Shares". The announcement noted a first tranche of 500 billion yen, and future tranches.&nbsp;The securities will be unlisted, non-transferable, require buying an embedded put from the company itself, and result in a mini&nbsp;"death spiral" impact on the common shares.&nbsp;My first reaction was "Huh?"After reading all the materials a second, third, and fourth time - in both Japanese and English - given my 15+yrs of looking at the microstructure of Japanese markets, special situations, and unusual security issuances, my reaction has evolved to a more considered, and evolved&nbsp;"Huh?"CONCLUSIONSThe explanations do not make a great deal of sense.&nbsp;The economics do not make a great deal of sense, nor do they match what should be the desired 'long-term investor' commitment.&nbsp;If one looks at the best and highest purpose of such a structure, one must conclude it might be meant for a different purpose than Toyota discloses.And if one takes a more skeptical view of Japanese issuance practices, this has to be seen as a slightly bearish development.If Toyota is issuing this now as a way to gain acceptance of issuing it to a different group of shareholders than it says, that is bad.If Toyota is wasting its time and energy for minimal benefit, that is bad.&nbsp;Toyota does not need to save 34bn yen in dividend payments over 5yrs when they start with 6 trillion yen in cash, and will generate another 10 trillion yen plus in cash over the next 5 years.&nbsp;

'Model AA' Shares - Good Governance Gone Bad?

Japan

FAST RETAILING CO., LTD. operates a chain of clothing stores, UNIQLO, throughout Japan and in other markets overseas including UK, China, Hong Kong, South Korea, US, France, Singapore and Russia.  The Company designs, manufactures, and retails its own line of casual clothing.

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