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Cablegate: Investor Revolt Shocks Corporate Japan

VZCZCXRO6662
PP RUEHFK RUEHGH RUEHKSO
DE RUEHKO #1495/01 1510823
ZNR UUUUU ZZH
P 300823Z MAY 08
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC PRIORITY 4687
INFO RUEHBJ/AMEMBASSY BEIJING 3643
RUEHFR/AMEMBASSY PARIS 6119
RUEHUL/AMEMBASSY SEOUL 9643
RUEHOK/AMCONSUL OSAKA KOBE 1785
RUEHKSO/AMCONSUL SAPPORO 8689
RUEHGH/AMCONSUL SHANGHAI 0430
RUEHFK/AMCONSUL FUKUOKA 8098
RUEHFT/AMCONSUL FRANKFURT 0498
RHEHAAA/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/TREASURY DEPT WASHDC
RUEAWJA/JUSTICE DEPT WASHDC
RUEHBS/USEU BRUSSELS
RUEHGV/USMISSION GENEVA 3343

UNCLAS SECTION 01 OF 02 TOKYO 001495

SIPDIS

DEPT FOR EAP - AMBASSADOR HASLACH
ALSO FOR EEB/IFD: DIBBLE AND KAMBARA
NSC FOR TONG
DEPT PASS USTR FOR CUTLER AND BEEMAN
USDOC FOR 4410/ITA/MAC/OJ
JUSTICE FOR ANTITRUST DIVISION - CHEMTOB
TREASURY DEPT FOR IA/CARNES AND POGGI
GENEVA FOR USTR

E.O. 12958: N/A
TAGS: EINV ECON OECD JA
SUBJECT: INVESTOR REVOLT SHOCKS CORPORATE JAPAN

REF: A. TOKYO 317
B. 07 TOKYO 3689

Sensitive But Unclassified. Please Protect Accordingly.

1. (SBU) Summary: The May 29 ousting of the directors of a
mid-sized Japanese company by a group of investors led by
controversial U.S. fund Steel Partners set a new precedent
for shareholder activism in Japan. Unlike Steel Partners'
previous moves, this latest has drawn only muted GOJ
reaction. Both GOJ and business leaders, however, will watch
closely how events unfold to determine the implications for
corporate governance in Japan. End Summary.

2. (U) Led by U.S. hedge fund Steel Partners, shareholders
of Alderans Holdings, a medium-sized Japanese maker of hair
replacements, voted May 29 to remove nine sitting directors,
including the company's CEO and to elect two new independent
directors to the board. This event marks the first time in
memory investors in a Japanese listed compnay voted to remove
directors for poor performance. Steel Partners, the firm's
largest stockholder with 26 precent of Alderans' shares, has
been in a year-long battle with the firm's management and
failed in a April 2007 bid to take over the company. Steel
Partners changed its strategy this year and joined with other
institutional investors, including U.S. pension fund Calpers,
to oust the management.

3. (U) Market reaction was immediate and positive.
Alderans' stock rose 8.7 percent directly following the vote,
and soared an additional 11 percent the next day, May 30.
Alderans' stock until recently had been trading 40 percent
below its 52-week high set in June 2007. Alderans'
executives May 30 announced the nine ousted directors --
together with the newly elected board members -- will
constitute a "provisional" board of directors until an
extraordinary shareholders meeting can be convened to elect
a permanent board.

Although It Was Always Possible, Result Was Still a Surprise
--------------------------------------------- -------

4. (U) While such a shareholder revolt was possible in
Japan, few analysts considered it likely, given existing
networks of cross-shareholdings and the generally passive
nature of Japanese retail investors. Nikko Citigroup equity
analyst Tsutomu Fujita, however, has long argued Japan's 2006
Company Law strengthened the power of shareholders by
changing the rules to requirement only a simple majority,
rather than the previous two-third vote, to remove existing
directors. In a May 30 report, Fujita noted, "Although it is
possible for companies to resist hostile takeovers by issuing
new share warrants in a 'poison pill defense' it is extremely
difficult for companies to use so-called poison pills against
hostile takeovers by means of director elections." Fukita
also argues shareholder power in Japan is also potentially
boosted by the fact that, unlike U.S. boards, Japanese
directors are all re-elected annually.

5. (SBU) METI Administrative Vice Minister Takao Kitabata, a
scathing critic of Steel Partners in the past (reftels), was
muted in his response to the Alderans vote. Asked at his
regular weekly press briefing May 29 if ousting Alderans'
board might have an impact on upcoming shareholder meetings,
Kitabata refused to comment directly. He only noted that "as
a general rule, shareholders determine corporate policies and
are free to vote as they wish individual cases." When asked
if he stood by his July 2007 criticism of Steel Partners as
"a greenmailer," Kitabata said his views "remain the same",

TOKYO 00001495 002 OF 002


but quickly added that was not a comment on the current
Alderans case.

A Turning Point in Japanese Corporate Governance?
--------------------------------------------- ----

6. (SBU) An executive for a Tokyo-based institutional
investor services company described the Alderans vote May 30
as a case of "You break it, you bought it." Steel Partners,
he said, has "broken Alderans' board" and Japanese executives
and investors will now be watching what the Fund does next.
If Steel takes advantage of the uptick in Alderans' share
price to "flip" the company for a quick profit, he warned, it
would confirm the prejudices of many Japanese about the
short-term attitude of activist funds. If, however, Steel
unveils a corporate restructuring plan, brings in new outside
management, and remains invested in the company until a
turnaround is complete, it could demonstrate to executives
and GOJ policy makers the ability of M&A -- even hostile
deals -- to foster positive corporate restructuring.
SCHIEFFER

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