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A potential bid for Toshiba Corp is set to test both corporate governance at the scandal-hit conglomerate as well as rule changes in Japan designed to improve transparency and protect minority shareholders.

The process puts the spotlight on the world’s third-largest economy’s efforts to attract more investments from overseas just as global private equity firms are hunting for more big-ticket deals in the country.

Toshiba, which has been hit by a succession of accounting and other scandals, has just lost its CEO Nobuaki Kurumatani, who left this week after facing criticism over governance issues. Buyout firms are already circling to take the industrial group private.

The conglomerate, whose products range from escalators to sewerage plants, is expected to consider interest expressed by private equity firms, including a potential $20 billion offer from CVC Capital Partners.

“This is the next big corporate governance test for Toshiba: whether they will run an open and transparent process, in line with METI’s Fair M&A Guidelines,” Seth Fischer, Oasis Management chief investment officer and Toshiba shareholder, told Reuters.

Japan’s Ministry of Economy, Trade and Industry (METI), in 2019, brought in new rules to provide greater protections for minority investors during transactions by laying out a process to secure fair deal terms.

They would require Toshiba, for example, to establish a special committee of independent outside directors and auditors promptly to evaluate the deal.

But the rules have faced criticism from investors because they are voluntary.

Japan, which has the world’s third-largest equity market, ranked seventh in Asia for corporate governance, behind Malaysia and Thailand, based on the latest scores from the Asian Corporate Governance Association (ACGA).

The investor organisation said that recent efforts in Japan to improve governance standards were more focused on codes of best practice and guidelines rather than company law and regulation.

“Takeover protections for minority shareholders in Japan, are much weaker than in other developed Asian markets such as Hong Kong and Singapore,” said Jamie Allen Secretary General of the ACGA.

Another complication for investors is that Japan tightened rules last year on foreign ownership of strategically important companies. Under these rules, foreign private equity bidders interested in Toshiba, whose technology is used in defence systems, could potentially be blocked from buying the company.

Some investors are concerned that if Toshiba is taken private with government support to allay national security concerns, other undervalued companies in ‘restricted industries’ might follow suit, Allen said.

Some Japan state-backed funds are considering buying Toshiba, the Nikkan Kogyo Shimbun reported on Thursday, a Japan-led bid which may be more palatable to regulators and management than rival offers by foreign funds.

Ashley Pittard, head of global equities at Sydney-based Pendal Group, an investor in several Japanese companies, hoped a Toshiba bid would lead to more corporate activity in Japan which could help to foster improved corporate governance standards.

“Japanese companies are making improvements in corporate governance aspects but it’s moving at a glacial pace,” he said.

The bidding process will put Toshiba’s own governance standards under scrutiny.

The company’s past problems included an accounting scandal in 2015 and allegations investors were pressured ahead of its annual shareholders’ meeting last year, which resulted in an independent probe into the allegations, resisted by Toshiba’s management.

Nicholas Benes, a corporate governance expert and head of the Board Director Training Institute of Japan, said the fact a majority of Toshiba’s board were apparently willing to support management in opposing the independent probe shows outside directors need “true independence, dedication and temerity.”

Concerning the take-private deal, “Given this board’s mix of independent directors … one would hope the board will conduct a fair auction that maximizes competition and delivers full value to shareholders,” he said.

Toshiba shares plunged 6% on Friday following media reports that the company plans to reject the CVC proposal.

Toshiba had said it would give the initial proposal careful consideration.



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