Toshiba clash with activist poses first test of national security law

A clash between Toshiba and a secretive Singapore-based activist fund is poised to create the first test case of Japan’s highly controversial new national security law on foreign investment.

The row was triggered when the fund, Effissimo, which is Toshiba’s largest shareholder with a 15 per cent stake, submitted a proposal that would have put its founder on the board of the 145-year-old Japanese industrial giant.

Last month, Toshiba rejected the proposal to add Effissimo’s founder and two other non-executive directors to its board. The plan, which Effissimo said was designed to strengthen compliance, comes after recent financial irregularities at one of Toshiba’s second-tier subsidiaries.

The highly public clash with its largest shareholder has erupted at an important juncture for Toshiba, as it tries to draw a line under an accounting scandal in 2015 and a financial crisis which almost took it down.

Under Japan’s newly revised Foreign Exchange and Foreign Trade Act (Fefta), which came into force last month, Effissimo’s proposal could draw government intervention if the move to shake up the board were considered a threat to Japan’s national security.

Toshiba, which is engaged in the nuclear industry, appeared along with 557 other companies that were designated by the government in May as the highest category of national security-related business.

Although the government has stressed that the Fefta regime is not designed to deter or constrain financial investors, foreign fund managers have expressed concerns that the law might be used to hobble activism and have been waiting for a test case to know where the lines might be drawn.

In an unusual move for Effissimo, whose strategy often involves taking very large stakes in blue-chip Japanese companies, it has partnered with Tadashi Kunihiro, a prominent lawyer with experience in unravelling the country’s corporate scandals.

“I agreed with Effissimo that there is still an issue with Toshiba’s corporate culture, and similar scandals could emerge in the future since it lacks a crisis mentality,” said Mr Kunihiro, who proposed the two other directors on Effissimo’s slate.

Effissimo’s investments have frequently caused shockwaves in corporate Japan and raised eyebrows within the government. The fund is run by the former colleagues of Japan’s most famous activist, Yoshiaki Murakami, who was convicted of insider trading in the mid-2000s. 

A Japanese government official said the dispute should be resolved between Toshiba and its shareholders through dialogue, but declined to comment on how the new Fefta law would be applied to this situation.

Effissimo declined to comment.

As part of its punishment for the accounting fraud in 2015, Toshiba was demoted to the second section of the Tokyo Stock Exchange in 2017 and was told that it had to wait at least five years before it could return. In the event, a series of structural changes to the TSE itself mean that Toshiba can now apply for an early return to the more prestigious first section.

A three-month investigation commissioned by Toshiba into the more recent irregularities at its subsidiary, Toshiba IT-Services Corporation (TSC), concluded that employees at the unit were not aware that transactions that inflated revenues were fake.

Mr Kunihiro said that Toshiba’s investigation did not go far enough to identify the root causes of the fake transactions. “It almost seems like Toshiba does not want to make this a bigger issue when it is trying to return to the TSE’s first section.”

Toshiba has said it takes the issue seriously and that it will set up a new compliance advisory meeting to improve its ability to spot potential misconduct.

Yoshimitsu Kobayashi, Toshiba’s chairman, said last month that the board had “no intention of clashing with our shareholders”. Toshiba is proposing to replace one non-executive director on its board, and the competing slates will be voted on at the group’s annual meeting at the end of July.

Toshiba has also previously said it has an “extremely progressive” and balanced board, with 10 out of 12 directors coming from outside the group.