HONG KONG--(BUSINESS WIRE)--Oasis Management Company Ltd. (“Oasis”) is the manager to funds that beneficially own approximately 5.5% of drugstore operator Kusuri No Aoki Holdings Co., Ltd. (3549 JT) (“Kusuri No Aoki”, “Aoki”, or the “Company”).
Under the leadership of President Hironori Aoki and Vice President Takanori Aoki (collectively, the “Aoki Brothers”), the Company has long been plagued by serious corporate governance failures, continued failure to protect of minority shareholder interests, and underperformance compared to peers. Kusuri No Aoki has failed to communicate a clear strategic direction to shareholders and has sheltered the Board from any meaningful dialogue with its shareholders.
Most egregiously, this dysfunction has allowed recent self-dealing by the President whereby the President caused the Company to issue a non-mandatory downward revision of the earnings forecast just before the issuance of stock options to only the Aoki Brothers, which led to a significant financial benefit at the expense of stakeholder interests. Based on available public information and the Company’s own disclosures, Oasis believes that, through this self-dealing, the Aoki Brothers alone exclusively acquired stock options worth more than JPY 7 billion from the Company in exchange only for JPY 52.5 million (i.e., an approximately 99% discount) and, as a result, the Company suffered approximately JPY 7 billion in damages. The basic calculation is as follows:
- Fair appraised value of the stock options under the annual security report: JPY 2,073 per share
- Actual paid option fees: JPY 15 per share
- Result: the Aoki Brothers paid JPY 52.5 million for stock options worth JPY 7.256 billion = a greater than 99% discount
The Board’s purported justification for such a discount is the exercise conditions (e.g., conditions tied to a certain performance target) set by the Company attached to the options. However, they have not disclosed any details as to how such a huge discount is calculated based on those exercise conditions. Moreover, JPY 2,073, not JPY 15, was formally announced as the “fair appraised value” per share under the statutorily required disclosure document. Given the above, Oasis reasonably believes that all of those conditions were, in fact, manipulated to be extremely easy to achieve and, therefore, not worth the discount that was awarded. These poor decisions made by the Board are a direct result of its weak independent oversight, which has long been criticized by other stakeholders and now also by ISS and Glass Lewis in their reports ahead of the upcoming Aoki AGM.
In its recent report, ISS concluded that the “poor corporate governance system” raises concerns regarding “undue influence of the founding family over the board and the company”. ISS thus recommended that shareholders support the Oasis-proposed independent Outside Director nominee Mr. Yoshiaki Ikei and important parts of Oasis’s proposed governance reforms.
Likewise, Glass Lewis also recognized these governance shortcomings, recommending that shareholders support Oasis’s proposal for the appointment of Mr. Ikei as an independent Outside Director and vote against the reappointment of Mr. Hironori Aoki.
Further, Aoki continues to make materially misleading comments in their disclosures against Oasis’s presentation, including in its August 8, 2023 public response, including:
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The Company claims that Oasis disclosed its presentation to the public without prior consultation with the Company.
MISLEADING:- In fact, Oasis has been seeking dialogue with the Company about many of the questions raised in our presentation. Rather, it is the Company that has been refusing to agree to set timely meetings for Oasis with the Aoki directors, with the first meeting scheduled on July 11, 2023, eight months after our initial request for a meeting with the President via letter dated November 17, 2022. While we repeatedly requested a meeting with the President and/or outside directors, this meeting was set instead with the Mr. Yahata, an internal director. The Company has to date continued to refuse to set a meeting with the President.
- Mr. Yahata confirmed to us that, other than attending earnings announcements, the President does NOT meet with shareholders. Ever.
- The Company has refused to answer the most basic question we have raised, such as the financial situation of the Aoki family during the period from December 2020 through January 2021 during which the downward revisions of the earnings forecast and the issuance of the stock options occurred. Mr. Yahata’s reasoning was that he is not aware of those private details of the Aoki family and he cannot answer these questions. This despite the Company refusing to set a meeting with Aoki family directors, essentially blocking Oasis from making any inquiries on these issues.
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Regarding the stock options, Aoki states that these were issued to increase the Aoki Brothers’ commitment to the Company’s growth.
MISLEADING:- Aoki fails to admit that the Aoki Brothers’ investment in these stock options was merely JPY52.5 Mn, while the stock the Aoki family owned at the time was worth approximately 60 bn.
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Aoki claims that these stock options were issued as “investments at a fair price”, and not as compensation.
FALSE:- In the Company’s AGM materials, under the section entitled “Stock options owned by the Company’s directors and statutory auditors, which have been issued as compensation for the execution of their duties”, the Company lists the stock options in question, admitting that these stock options were in fact issued as compensation.
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The Company claims that the threshold of “change of 10% in revenue and change of 30% in various profits”, which they mentioned during a meeting with Oasis, is a threshold that is widely used, and did not refer specifically to Aoki’s policy, though Aoki’s threshold is a “change of 15-20% in various profits, with other considerations”.
MISLEADING:- This is Aoki’s attempt to override their past statement, as during the meeting with Oasis, Mr. Yahata, director in charge of IR, clearly stated that, “change of 10% in revenue and change of 30% in different profits is one of the considerations for making revisions of the earnings forecast”. This standard was explained as the reason why revisions to the earnings forecast were not made during the fiscal year ending May 2023.
- Following the meeting in which the above statement was made, Oasis sent a letter to Aoki to clarify and confirm Oasis’s above understanding, and asked Aoki to make corrections if Oasis’s understanding was wrong. Aoki has made no such corrections, implying Aoki had the same view as Oasis on this point in the past.
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The Company tries to justify how their revision of their earnings forecasts were not unusual.
MISLEADING:- The Company fails to explain the reasons for its lack of consistency with their past practices for FY ending May 2020. For example, the Company has shown significant lack of willingness to appropriately update its forecasts, such as in the case of the fiscal year ending May 2023, in which their Q3 cumulative ordinary income was higher than their full-year ordinary income forecast, yet the Company failed to make a revision.
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Aoki claims that they started another rewards campaign starting from December 31, 2019, after the end of the rewards campaign that ended November 30, 2019, in an attempt to justify their downward revision of the forecast.
MISLEADING:- This campaign is simply a significantly down-scaled campaign compared to the previous campaign, and is not justification for a forecast implying a weaker Q3 and Q4 against the actual Q2 results.
- Details of the campaign ending November 30, 2019: 5% reward for customers using the Company’s pre-paid card and 2% or 3% reward for customers paying by cash.
- Contents of the campaign starting December 1, 2019: 3% or 5% reward for customers using the Company’s pre-paid card and no rewards for customers paying by cash.
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Regarding the exercise conditions attached to the stock options, Aoki asserts that, “the Company believes the conditions are not easy to achieve”, without any detailed explanation. Aoki bases its claim on the facts that, “target ordinary income was a 170% of the forecast figure for the fiscal year”, “there was increased competition in the Company’s main business areas as large competitors started business in the Hokuriku area”, and “there was a downward revision of decrease in its profits for the first time in nine years”.
MISLEADING:- These explanations either lack qualitative support or are based on a forecast which is itself being questioned.
- Aoki fails to address the fact that the historic CAGR of the Company’s ordinary income was 16.4% for the past three-year period and 26.8% for the past ten-year period, while the minimum required CAGR to achieve the ordinary income target was only 4.2%.
- The conditions only require the Company to achieve an ordinary income of 22 bn JPY once in the six fiscal years from the year ending May 2024 to the year ending May 2029.
- The conditions also allow for M&A to achieve the ordinary income growth without taking into consideration the cost of capital making the ordinary income target easily achievable.
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Aoki makes comments about the building owned by Mr. Keisei Aoki (the “Building”), and the adjacent historic site owned by the Company (the “Historic Site”) (collectively, the “Facility”)
MISLEADING:- Aoki makes confusing comments such as, “the Historic Site and the Building are connected by bridges but …”, the “Historic Site and the Building are … independent structures”.
- Aoki claims it owns the Historic Site for recreational purposes and also with the aim of preserving the Historic Site and the Company’s place of origin. However, the Company failed to explain how the Facility is used as a recreational facility when Oasis noted that there is no history of the Facility being used as a recreational facility as far as Oasis’s surveys indicate and the Facility’s neighbors are aware.
- Further, not only is the Historic Site connected to the Building and easily accessible from the Building, Mr. Keisei Aoki uses the address of the Historic Site as his place of residence in many public records. If Mr. Keisei Aoki does not actually reside in the Historic Site, this suggests that Mr. Keisei Aoki has been making false filings. Oasis stands ready to disclose multiple public records where Mr. Keisei Aoki uses the address of the Historic Site as his address, if the Company and Mr. Keisei Aoki so wish.
- Aoki also states that, upon its inquiry to Hakusan City, it received confirmation that the City has never answered that an individual lives in the Historic Site. However, Oasis made a telephone call to Hakusan City on July 10, 2023, and received a response from the city official with whom we spoke indicating that an individual does live in the Historic Site.
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Aoki accuses Oasis of using misleading language, pointing out that the statement Oasis made regarding Aoki not increasing its maximum board size is based on ISS’s guidelines on the “reduction of the maximum size of the board”, and thus wrongly gives the impression that the act of not increasing the maximum size of the board is a widely-recognized bad governance practice.
MISLEADING:- First, Oasis has no intention of misleading other shareholders and has never done so, and Oasis clearly identified that the quote is from the “reduction of the maximum size of the board” section of the ISS guidelines.
- Aoki fails to recognize the spirit of the ISS guidelines, which is that board seats should not be filled in order to facilitate the board blocking shareholder proposals of director candidates.
- As such, in their analyses, both ISS and Glass Lewis contemplate that Mr. Fujii’s appointment as a director candidate seems to be in an attempt to block Oasis’s nominee, Mr. Ikei, and hence both organizations recommend shareholders vote AGAINST Mr. Fujii and vote FOR Mr. Ikei.
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Aoki claims that many of Oasis’s critiques of Mr. Fujii’s businesses are based on outdated information and are not an optimal bases for forming opinions, while also claiming that Aoki has an understanding of the current state of Mr. Fujii’s businesses and holds a different view to Oasis.
MISLEADING:- Oasis urges both the Company and Mr. Fujii to disclose the current status of Mr. Fujii’s businesses, including his biomass business which has failed to even start operations two years after its initial planned operation start date, so that shareholders can form their judgements based on the latest information.
- Points mentioned by Aoki fail to address our concerns that all of Mr. Fujii’s businesses seem to be sub-par in scale and lack relevancy to Aoki’s business.
- Overall, and finally, Aoki’s disclosure amounts to cherry picking the points on which they can comment superficially and make irrelevant points while failing to provide any substantive answers for the some of the most serious concerns raised by Oasis.
Oasis believes that the recent stock option issuance represents the control of the Aoki family on the Company and the Company’s tendency to benefit only the Aoki family at the expense of the interests of the minority shareholders. Shareholders should deal severely against Mr. Hironori Aoki and Mr. Takanori Aoki, who have abused their positions to make dealings that only benefit themselves. Aoki’s corporate governance is currently dysfunctional, thus, the removal of Mr. Hironori Aoki and Mr. Takanori Aoki is the first necessary step in the right direction to achieve true reform.
Oasis urges Aoki shareholders to vote AGAINST the following Company proposals in connection with the upcoming August 17 Company AGM:
Proposal #2 |
Re-election of Aoki’s president, Mr. Hironori Aoki, and his brother, the Vice President, Mr. Takanori Aoki |
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Proposal #2 |
Election of the Company’s Outside Director candidate, Mr. Hiromitsu Fujii |
Oasis also urges shareholders to vote FOR our proposed independent Outside Director candidate to enhance Aoki’s oversight and protect the interests of stakeholders against the governance abuses under the Aoki family control and FOR Oasis’s other proposals:
Proposal #4 |
Election of Mr. Yoshiaki Ikei, a truly independent, highly qualified Outside Director candidate |
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Proposals #5 & 6 |
Introduction of a Lead Independent Director position and the establishment of a nomination and compensation committee to enhance oversight of management |
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Proposals #7 & 8 |
Introduction of a new compensation plan for Outside Directors |
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.
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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 of Responsible Institutional Investors” (a/k/a Japan Stewardship Code) and in line with those principles, Oasis monitors and engages with our investee companies.
The information contained in this press release (referred to as the "Document") is an information resource for shareholders in Kusuri No Aoki offered by Oasis, the investment manager to funds that are shareholders of Kusuri no Aoki (the "Oasis Funds"). The Document is not intended to solicit or seek shareholders' agreements to jointly exercise any voting rights with Oasis. 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 share ownership with the relevant Japanese authority for public disclosure under the Financial Instruments and Exchange Act. Oasis does not intend to be subjected to such notification requirement. The Document exclusively represents the opinions, interpretations, and estimates of Oasis.
