Toshiba's spin-off plan faces much opposition at pivotal shareholder vote

Japan's troubled Toshiba Corp is going into Thursday's critical shareholder vote on its plan to spin-off its devices business with very long odds.

Its top three shareholders - Effissimo Capital Management, 3D Investment Partners and Farallon Capital Management - all activist shareholders with which Toshiba management has had a contentious history - oppose the plan as do proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis.

Also on the table is a proposal from Singapore-based 3D calling for management to solicit buyout offers from private equity - a motion that has the support of Effissimo, Farallon as well as Glass Lewis but, perhaps significantly, not ISS.

Each proposal needs 50 per cent of the vote to pass.

Whatever the outcome, Thursday's vote represents another major battle in a four-year scandal-filled war being waged between the 146-year-old conglomerate and activist shareholders over the direction of the company.

Toshiba management argues a spin-off is the best way to maximise shareholder value. Sources familiar with the matter have also said Toshiba hopes the plan would lift its share price to the point where activist shareholders would be enticed to leave.

Toshiba has rejected calls to seek a private equity buyout, arguing that potential offers suggested so far were insufficiently compelling and would raise concerns about the impact on its business and staff retention.

But opposition to Toshiba's plans was widespread as well as vocal, and at present, activist shareholders appear to have a lot of momentum on their side.

Together, Effissimo, 3D and Farallon own around a quarter of Toshiba. All foreign activist funds combined are estimated to hold 30 per cent while more broadly overseas investors own 50 per cent of the industrial conglomerate.

Prominent institutional investors which have already disclosed they have voted against the spin-off include Norway's sovereign wealth fund, which owns 1.22 per cent, the California Public Employees' Retirement System with 0.43 per cent and the State Board of Administration of Florida with a 0.22 per cent stake.

Large investors that have yet to reveal their votes include BlackRock which owns more than 5 per cent, Elliott Management which, according to sources, has nearly 5 per cent and Vanguard which has 2.6 per cent according to Refinitiv data.

None of Japan's major domestic asset managers have revealed their voting plans.

Uneven support for 3D proposal

If the spin-off proposal fails, hedge fund investors are likely to emerge emboldened, gaining momentum in their push for a buyout. But even if management wins, some shareholders plan to fight on regardless, sources familiar with the matter have told Reuters on condition of anonymity.

Toshiba said it will continue to make every effort to gain shareholder support for the break-up plan.

"Large shareholders will stay unless share prices go up," said Fumio Matsumoto, chief strategist at Okada Securities.

"A private equity solution would be best for shareholders hoping for a quick exit with solid returns, but may not necessarily be best for Toshiba," he added.

Support for 3D's proposal is, however, somewhat less clear-cut than opposition to Toshiba's spin-off plan.

In addition to ISS advising against the proposal, CalPERS has voted against it.

But Norway's sovereign wealth fund has voted in favour as has Toshiba external director Raymond Zage, a Farallon adviser who says he is a top 100 shareholder and has broken ranks with the public stance of the board.

Toshiba's management has been under pressure from activist funds since it sold 600 billion yen ($5 billion) of stock to dozens of foreign hedge funds during a crisis stemming from the bankruptcy of its U.S. nuclear power unit in 2017.

Acrimony between the two sides hit several boiling points in the past two years. Last June a shareholder-commissioned probe found Toshiba colluded with Japan's trade ministry - which sees the conglomerate as a strategic asset due to its nuclear reactor and defence technology - to block overseas investors from gaining influence at its 2020 shareholder meeting.

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