(Stock Code: 3549 JT)
* Aoki continues to make insufficient and
misleading explanations about the Stock Options
* Oasis urges Aoki to answer questions and
make disclosures on key issues
* Oasis challenges Aoki’s misleading claims
on right to disclose materials
*Oasis urges shareholders to vote AGAINST
the re-election and vote FOR the dismissal of the Aoki Brothers and
Mr. Yahata to improve Aoki’s governance
More information available at
www.KusuriNoAokiCorpGov.com
Oasis Management Company Ltd. (“Oasis”) is the manager to funds
that beneficially own approximately 9.7% of drugstore operator
KUSURI NO AOKI HOLDINGS CO., LTD. (3549 JT) (“Kusuri No Aoki” or
“Aoki” or the “Company”). Oasis has adopted the Japan FSA’s
“Principles of Responsible Institutional Investors” (a/k/a the
Japan Stewardship Code) and, in line with those principles, Oasis
monitors and engages with its investee companies.
As a long-term major shareholder of Aoki, Oasis has been
engaging with the Company since 2022. Throughout our engagement,
Oasis has raised questions and highlighted issues related to stock
options that were issued at a steep discount of over 99% (the
“Stock Options”) to President Hironori Aoki and Vice President
Takanori Aoki (together, the “Aoki Brothers”).
As a result of our concerns over the Stock Options, Oasis
initiated a public campaign (available here) highlighting these
issues, and has submitted shareholder proposals for the Company’s
upcoming AGM calling for the dismissal of the Aoki Brothers and
Aoki Director Mr. Ryoichi Yahata. Additionally, Oasis has initiated
a shareholder derivative lawsuit against the Aoki Brothers, Mr.
Ryoichi Yahata, and another member of the Aoki Family.
In response to Oasis’s engagement, the Company issued press
releases on July 18 and July 26 (the “Press Releases”) in which
Aoki continues to seek to justify the Stock Options and continues
to claim that the value of the Stock Options was calculated validly
by Plutus Consulting (“Plutus”) using a “standard option pricing
model”. However, their explanation is woefully inadequate for the
following reasons.
1. Failure to provide any answers to
the questions and issues raised by Oasis
The Press Releases fail to provide explanations with respect to
the issues Oasis has raised in its engagement or campaign
materials. As such, we call on Aoki to enhance its disclosure on
the points below related to the Stock Options:
The overall valuation:
- Aoki should explain why they consider the valuation methodology
used for the Stock Options to be a “standard option pricing model,”
despite Oasis clearly explaining, and even citing Plutus itself,
that there are no “standard” methodologies for valuing stock
options with business-performance-related exercising
conditions.
- Aoki should explain whether they still believe the statement
they made to the Board -- that “the fair value would be the same if
calculated by other appraisers” -- is true. If so, they should
provide an explanation as to why their valuation is so different
from that calculated by a third-party appraiser retained by
Oasis.
- Aoki should explain the details of the discounted value based
on each exercising condition to justify the significant discount
from JPY 2,642 per share (i.e., the option value without the
complex and, in our view, unnecessary and ultimately irrelevant
exercising condition) to JPY 15 per share (i.e., the issuance
price) despite the lack of material evidence in the Plutus
valuation report.
The decision-making process:
- Aoki should explain why they thought it was appropriate to
approve the issuance of the Stock Options, which would cause an 11%
dilution if executed, in a Board meeting lasting only 75 minutes
and apparently without any prior explanation relating to the Stock
Options provided to the Board.
- Aoki should explain why the Board did not hold any substantive
discussions on the details of the exercising conditions, even
though this point is crucial for ensuring alignment of interests
between the Aoki Brothers and the Company.
- Aoki should explain why the Board approved the transaction,
despite the Board of Directors not receiving any meaningful answers
to their questions and concerns.
- Aoki should explain why the Board did not discuss or mention a
law firm’s opinions on the appropriateness of the issuance of the
Stock Options, despite making statements at the 2023 AGM that the
Stock Options were issued based on a law firm’s opinion regarding
the appropriateness.
The exercising conditions:
- Aoki should explain why they chose ordinary income excluding
the amortization of goodwill as the metric for the exercising
conditions, especially considering that goodwill and amortization
have increased significantly since then as a result of “buying”
ordinary income through aggressive M&A.
- Aoki should explain why the exercising conditions have no
connection with the Company’s mid-term plan. The exercising
conditions should be a key performance metric for the Company;
however, ordinary income is clearly not a key metric, as it has
never been used in the mid-term plans.
Estate planning:
- Aoki should explain how the Aoki Brothers were able to secure a
loan of over JPY 23 billion in just a few weeks following the
downward revision to the Company’s earnings. We believe securing
this loan during this time period would likely have been very
difficult, if not impossible, if the loan discussion truly took
place after the downward revision. This loan enabled the Aoki
Brothers to acquire shares owned by their father, Mr. Keisei Aoki,
at a depressed price following the downward revision, benefiting
both the Aoki Brothers and Mr. Keisei Aoki.
- Aoki should explain why they began discussions with Plutus long
before the downward revision (we believe as early as July or August
2019), if the stated reason for issuing Stock Options was to help
the Company recover after the downward revision announced in
December 2019.
- Aoki should explain why they issued the Stock Options despite
the Aoki Brothers acquiring significant shares from their father.
This directly contradicts the Company’s stated reason for issuing
the Stock Options, which was to incentivize the Aoki Brothers, who
were already substantial shareholders.
Auditors and conflicts:
- Aoki should explain the true reasons for changing their
accounting auditor. Aoki stated that retaining KPMG would lead to
higher audit fees. However, the fees of the Company’s new
accounting auditor have increased significantly since the switch
and are now more than double those of KPMG.
- Aoki should explain how they managed the conflicts of interest
and the extent of the Aoki Brothers’ involvement in the preparation
of the Stock Options. The Stock Options were prepared by the
Internal Controls Promotion Office, which reports directly to
President Hironori Aoki.
- Aoki, or Aoki’s Corporate Auditors, should explain which
external valuation vendors were used to assess the request letter
from Oasis to initiate a lawsuit against the Aoki Brothers. This
should be clarified given that, in response to our claim that
“Aoki’s Corporate Auditor’s assessment was highly flawed” due to
the fact that the Corporate Auditors did not hire their own
third-party appraiser but, instead, asked Plutus to investigate
whether the specific issues raised by Oasis in connection with
Plutus’ valuation were true or not, Aoki counterclaimed that,
“Aoki’s Corporate Auditors utilized assistance from external
experts”. In addition, if Aoki’s Corporate Auditors actually hired
any impartial third-party appraiser(s) for the purpose of assessing
whether the issues Oasis identified regarding Plutus’ valuation
report are true or not, they should also clarify why the letter
from Aoki’s Corporate Auditors to Oasis references “according to
Plutus” without mentioning any other external valuation
vendors.
Document disclosure:
Moreover, if Aoki genuinely believes that their process and
valuation were fair, they should make the following documents
public so that shareholders can review them and make informed
decisions for the upcoming AGM based on primary sources of
information.
- The full valuation report, including all supporting details
provided by Plutus, so shareholders can examine the contents of
the report for themselves.
- The minutes of the Board meeting where the issuance of the
Stock Options was approved, so that shareholders can assess
whether the decision-making process was appropriate.
2. Aoki’s misleading claims about
Oasis’s disclosures
In an attempt to divert the discussions away from the true issue
-- the Aoki Brothers’ accountability -- Aoki has continued its
attack on Oasis, one of its largest shareholders, claiming that the
act of Oasis disclosing some of the materials (the “Materials”)
that it has obtained from Aoki through a legal procedure “may
constitute illegal activity”. As part of such argument, Aoki claims
that because the board minutes may contain secret information
including trade secrets, it argues that although a shareholder is
allowed to inspect and make copies of the board minutes to the
extent necessary for its exercise of shareholder’s rights, it is
“not allowed to disclose [any such information] to unspecified
third parties”. Aoki supports their argument by quoting the Court
decision: “As Article 371, Paragraph 3 of the Companies Act allows
inspection and copying only to the extent necessary for the
exercise of shareholder rights, it is only natural that
shareholders owe the duty of good faith that the information
obtained through such inspection and copying should not be
disclosed to unspecified third parties in an abusive manner.”
This is incorrect and misleading. Aoki distorts the actual
intent shown in the Court decision by citing only those parts which
could appear, when taken out of the context of the full decision,
to support their standpoint, thus attempting to mislead their
shareholders and stakeholders. In fact, in response to the request
made by Aoki to the Court that “even if the petition is allowed,
public disclosure of the board minutes obtained [by Oasis] through
inspection and copying shall be prohibited without any exception”,
the Court did not accept such argument and, to the contrary,
supported Oasis’s position that,
“public disclosure to any third party as a
part of a “legitimate” exercise of shareholder’s rights
can, of
course, be possible”. To show
the full quote including the part Aoki intentionally hid, the court
ruled as follow:
- “As Article 371, Paragraph 3 of the Companies Act allows
inspection and copying only to the extent necessary for the
exercise of shareholder rights, it is only natural that
shareholders owe the duty of good faith that the information
obtained through such inspection and copying should not be
disclosed to unspecified third parties in an abusive manner.
Hence, it could not be said that the public disclosure of the
valuation report to any third party should be prohibited without
any exception.” (emphasis by Oasis)
In addition, in support of Aoki’s claim, Aoki also alleged
regarding last year’s public campaign conducted by Oasis that
“[Aoki] explained that all issues raised by [Oasis] were wrong.
However, [Oasis] ignored such explanation and continued public
disclosure of [the public campaign materials] and disseminating
wrong information to investors”.
However, in actuality, the Court clearly held that, “given the
content of [the public campaign materials], it cannot be denied
that [Oasis] publicly disclosed [the public campaign materials]
with the aim of bringing attention to [Aoki’s] governance issue and
explain the background of their shareholder’s proposal conducted
for the purpose of enhancing Aoki’s corporate value”, and as a
result, the Court issued the order cited above.
Therefore, the key point of the Court decision cited by Aoki is
that the Court clearly supported the position that public
disclosure of the Board minutes obtained through inspection is
legal as long as such disclosure is conducted to the extent
necessary for exercising shareholder’s rights and is not conducted
in an “abusive” manner.
Aoki intentionally ignored this point, selected only those
portions of the court decision that could seem, in isolation, to
support Aoki’s view, and circulated its unreasonable interpretation
taking full advantage of the fact that many other stakeholders
cannot directly read the court decision for themselves. Oasis has
fully complied with the Court’s order, only quoting parts of the
Board minutes and then only to the extent necessary to make its
point for improving the Company’s corporate governance and
enhancing its corporate value, which would fall within the
“legitimate” exercise of shareholder’s rights.
To be clear, Oasis has not disclosed any trade secrets
whatsoever, but disclosed only the limited portions of the minutes
sufficient to disclose the short duration of the relevant Board
meetings and the limited details of the discussion of the Stock
Options by the Board. Aoki’s attempted criticisms of Oasis’s
actions in this regard are baseless, reckless, and misleading.
Oasis is confident that its use of the Materials falls within the
“legitimate” exercise of our shareholder’s rights as recognized by
the court. Oasis would like to point out that Aoki’s act itself to
intentionally emphasize the “possibility” of Oasis’s acts being
illegal and attacking Oasis without sharing the full context may
constitute illegal activity.
***
Oasis reiterates its recommendations to fellow Aoki shareholders
to vote AGAINST the re-election
and vote FOR the dismissal of
President Hironori Aoki, Vice President Takanori Aoki, and Mr.
Ryoichi Yahata. Oasis also demands that the Aoki Brothers not
exercise the Stock Options until a judicial decision is rendered by
the Court as Oasis pursues a shareholder derivative lawsuit against
the Aoki Brothers to protect the Company and its shareholders.
For more information, please visit www.KusuriNoAokiCorpGov.com.
We welcome all stakeholders to contact Oasis at
info@KusuriNoAokiCorpGov.com to help improve Kusuri No Aoki’s
corporate governance.
***
Oasis Management Company Ltd. manages private investment
funds focused on opportunities in a wide array of asset classes
across countries and sectors. Oasis was founded in 2002 by Seth H.
Fischer, who leads the firm as its Chief Investment Officer. More
information about Oasis is available at https://oasiscm.com. Oasis
has adopted the Japan FSA’s “Principles for Responsible
Institutional Investors” (a/k/a the Japan Stewardship Code) and, in
line with those principles, Oasis monitors and engages with our
investee companies.
The information and opinions contained in this press release
(referred to as the "Document") are provided by Oasis Management
Company (“Oasis”) for informational or reference purposes only. The
Document is not intended to solicit or seek shareholders to,
jointly with Oasis, acquire or transfer, or exercise any voting
rights or other shareholder’s rights with respect to any shares or
other securities of a specific company which are subject to the
disclosure requirements under the large shareholding disclosure
rules under the Financial Instrument and Exchange Act. Shareholders
that have an agreement to jointly exercise their voting rights are
regarded as Joint Holders under the Japanese large shareholding
disclosure rules and they must file notification of their aggregate
shareholding with the relevant Japanese authority for public
disclosure under the Financial Instruments and Exchange Act. Except
in the event that Oasis expressly enters into the agreement as a
joint holder requiring such disclosure, Oasis does not intend to
take any action triggering reporting obligations as a Joint Holder.
The Document exclusively represents the opinions, interpretations,
and estimates of Oasis.
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inquiries, please contact: Taylor Hall media@oasiscm.com