Toshiba's TSR underperformance and discounted valuation are the result of repeated breaches of trust
Company's intention to deploy ¥1.3 trillion of excess cash flow for investments is reckless given track-record
Farallon's EGM proposal gives shareholders key opportunity to ask Toshiba to honor its commitments to capital allocation discipline under the Toshiba Next Plan
Company's attempts to reassure shareholders and back-pedal have been misleading and disingenuous
SAN FRANCISCO, March 2, 2021 /PRNewswire/ -- Today, Farallon Capital Management, L.L.C. ("Farallon") issued a public letter to shareholders of Toshiba Corporation ("Toshiba" or the "Company") (6502.T) in connection with the upcoming extraordinary general meeting of shareholders ("EGM"). Farallon is asking Toshiba shareholders to support the Farallon EGM proposal, which calls upon the Company to honor its capital allocation commitments under the Toshiba Next Plan or to explain and seek approval from shareholders for capital policy changes.
Farallon also released a detailed presentation on its EGM proposal today. The presentation is available at this link: https://farallonmaterials.com/wp-content/uploads/Farallon-Toshiba-Shareholder-Presentation.pdf
Farallon also provided a response to Toshiba's presentation released on March 1. This presentation is available at this link: https://farallonmaterials.com/wp-content/uploads/Farallon-Toshiba-Shareholder-Presentation-Responding-to-Toshiba.pdf
Farallon's shareholder proposal is available – in both English and Japanese – at this link: https://farallonmaterials.com/wp-content/uploads/Farallon_Shareholder-Proposal.pdf
The full text of the letter is below.
March 2, 2021
Dear Fellow Toshiba Shareholders,
Farallon Capital Management (together with its affiliates and representatives, "Farallon," or "we") is currently the second-largest shareholder of Toshiba Corporation ("Toshiba" or "the Company"). Farallon is a multi-strategy investment firm founded in 1986 that manages capital on behalf of institutional investors, pension funds, foundations, and individuals. We are not an activist fund; rather, we seek lasting and mutually respectful relationships with management teams and boards and aim to positively influence the companies in which we invest through constructive dialogue.
As one of Toshiba's largest shareholders since early 2017, we have been intensely focused on helping the Company build value and investor trust. At the core of Toshiba is a preeminent infrastructure services business that generates high ROIC and should provide stable, recurring cash flow for decades to come. We have engaged in regular dialogue with the Company and have maintained a constructive relationship with its management team. In 2018, Farallon was supportive of the Toshiba Next Plan ("TNP"), where the Company pledged to focus on organic growth, a disciplined approach to M&A through small-scale transactions, and the return of excess capital to shareholders.
Despite having committed to this very clear capital policy, in November 2020, the Company announced a sudden and dramatic shift in its progress report. It explicitly stated its intention to use ¥1.3 trillion of excess cash flow on investments, which assume M&A. Many observers – including sell-side analysts, journalists, and investors – were surprised by the unexplained departure from the TNP and Toshiba's newly announced focus on engaging in large-scale M&A1. The sudden departure was concerning given that Toshiba has one of the worst track records in terms of value creation (or lack thereof) from capital allocation – the Company invested almost ¥7 trillion over the past 20 years without any tangible increase in shareholders' equity.
To help restore shareholder trust we initiated a process in December 2020 to call an extraordinary general meeting of shareholders ("EGM"). That meeting is now scheduled to be held on March 18, 2021.
At this EGM, shareholders will have a say on whether they want transparency and accountability as it relates to Toshiba's capital policy. We view our proposal as very modest: we are essentially asking the Company to follow its pre-existing capital policy commitments as outlined in the TNP, or seek shareholder support for an alternative. Shareholders voted overwhelmingly at the Annual General Meeting in 2020 to have a say on capital policy and our proposal would only reinforce the opinion shareholders have already voiced on this crucial matter.
Unfortunately, Toshiba's response to our calling of the EGM has only confirmed the critical importance of shareholders making their voices heard. The Company continues to provide ambiguous and contradictory statements that muddy the waters while leaving room to re-trade shareholders again. For instance, in their response regarding M&A2, it appears they are pledging not to make a ¥1 trillion acquisition but they are leaving themselves the ability to make ¥1 trillion of acquisitions in aggregate. They have also mischaracterized our proposal as removing their flexibility in capital allocation3 whereas our language explicitly provides them flexibility within the TNP.
Importantly, we had asked for the vote at the EGM to be an opinion poll (a so-called "precatory resolution") rather than a binding vote (an amendment to Articles of Incorporation). Toshiba rejected the "precatory resolution" on the grounds that such a non-binding resolution was illegal, despite our and prominent academic opinion to the contrary. Now Toshiba is attempting to claim that because the vote will be a binding amendment to the Articles of Incorporation, it is "an excessive intervention" and therefore unwise. This is nothing short of double-speak. Is this the behavior of a company that is proactively listening to its shareholders?
Restoring shareholder trust at Toshiba will not be easy. A normal company would not be parsing words with its largest shareholders over such fundamentally important issues or making an argument that it is maximizing value for shareholders while the poor total shareholder return objectively indicates otherwise. We believe this is a critical milestone for shareholders to provide transparency and accountability so that Toshiba can realize its potential.
Farallon Capital Management, L.L.C.
Farallon Capital Management, L.L.C., is a global investment firm founded in 1986 and registered as an investment advisor with the United States Securities and Exchange Commission since 1990. Farallon seeks investments across asset classes and around the world through a process of bottom-up fundamental research and analysis emphasizing capital preservation. More information on Farallon is available at www.faralloncapital.com.
This press release is for general information purposes only and is not complete. Under no circumstances is this intended to be, nor should it be construed as an offer, invitation, marketing of services or products, advertisement, inducement or representation of any kind, nor as investment advice or a recommendation to buy or sell any investment products or make any type of investment in securities. This press release should not be construed as legal, tax, investment, financial or other advice. Additionally, this press release should not be construed as an offer to buy any investment in any fund or account managed by Farallon Capital Management L.L.C. or any of its affiliates or representatives (collectively, "Farallon").
This press release should not be construed as soliciting any other Toshiba shareholder to authorize Farallon or any third party to exercise voting rights on such shareholder's behalf with respect to any matter proposed to be presented to shareholders as indicated in the Convocation Notice of the Extraordinary General Meeting of Shareholders. This press release, and the presentation referenced herein, is not intended and should not be considered to solicit, encourage, induce or seek for Toshiba shareholders to authorize Farallon or any other third party as their proxy in exercising their voting rights on their behalf. Farallon is not soliciting or requesting other shareholders of Toshiba to jointly exercise their shareholders' rights with Farallon (including, but not limited to, voting rights). Farallon declares that it does not intend to be treated or deemed a "joint holder" (kyo-do hoyu-sha) under the Japanese Financial Instruments and Exchange Act or a "related person" (kankei-sha) under the Foreign Exchange and Foreign Trade Act with other Toshiba shareholders.
This press release is made available exclusively by Farallon and not by or on behalf of Toshiba or its affiliates or subsidiaries or any other person. Farallon is not an affiliate of Toshiba and neither Farallon nor its principals or representatives are authorized to disseminate any information for or on behalf of Toshiba, and nor does Farallon purport to do so.
Junko Morinaga / Mizuha Matsuka / Shinichiro Ibuski
1 Q2 Toshiba Earnings Call, November 11, 2020 (https://www.toshiba.co.jp/about/ir/en/pr/voice/tpr2020q2e.mp3 01:34:24)
2 Maximizing Value for Toshiba Shareholders, March 1, 2021 (http://www.toshiba.co.jp/about/ir/en/stock/pdf/tsm2021e_1.pdf p7)
3 Maximizing Value for Toshiba Shareholders, March 1, 2021 (http://www.toshiba.co.jp/about/ir/en/stock/pdf/tsm2021e_1.pdf p8)
SOURCE Farallon Capital Management, L.L.C.