What's Next at Japan's Idemitsu as Court Battle Looms: Q&A

  • Idemitsu plans to raise $1.2 billion in a public share sale
  • Founding family argues share sale intended to dilute its stake

Idemitsu Kosan Co.’s plan to raise as much as 138.5 billion yen ($1.2 billion) by selling 48 million shares sent its stock plummeting the most since 2008 on Tuesday. The refiner’s move is the latest in the fight with its founding family over a merger with long-time rival Showa Shell Sekiyu K.K.

Here’s a rundown of the issues behind one of Japan’s most acrimonious business battles:

What has Idemitsu been trying to do?

Japan’s government has been pushing oil refiners to consolidate as domestic demand declines with a shrinking population and as people shift to more energy-efficient cars.

Idemitsu proposed a merger with Showa Shell in 2015. While it’s unclear how the merger will be structured, the proposal has been delayed from an initial plan to complete the deal by April 2017 after unexpected opposition from Idemitsu’s founding family. Relations between the family and Idemitsu executives have since soured.

Why is the founding family against it?

Idemitsu’s founding family, including 89-year old Shosuke Idemitsu and his sons, controls about 34 percent of the company, though none of the members sit on the board of directors. The family cites a potential clash in corporate cultures and even geopolitical complications as reasons for opposing the merger.

The family said in a statement Monday that the latest move by Idemitsu to sell shares is an attempt to dilute its stake to push through the merger. Idemitsu requires approval from two-thirds of shareholders for the merger, which the family indicated it would block. However, the share sale means the family’s stake would fall to 26 percent, assuming it doesn’t buy any new stock, eliminating its veto power.

The company only needs board approval to issue new shares.

What can the founding family do now?

The family could join the global offering, but that would require spending more than 43 billion yen to maintain a 33.34 percent stake, according to Bloomberg calculations. The time frame of the offering is too narrow to come up with such a large amount of cash, according to Jefferies Group LLC.

The last option is the courts. The family said Tuesday that it filed a request for an injunction at the Tokyo district court to halt the share issuance, arguing the sale is a direct attempt by management to dilute the family’s stake. Idemitsu said in a supplementary filing Wednesday that the claim has no merit.

What is the potential outcome in court?

The court’s decision may rest on whether the family can prove the share issuance is being used to dilute its stake and eliminate its veto power, according to Masanori Matsukawa, a lawyer who specializes in areas including the Japanese corporate law at Yodoyabashi & Yamagami Legal Professional Corp.

Idemitsu says the share sale is intended to fund investments, including repaying short-term loans used to purchase Showa Shell shares, develop the Nghi Son Refinery in Vietnam, as well as research and development. It would be difficult for Idemitsu to argue that the share sale isn’t an attempt to push ahead with the Showa Shell merger, Matsukawa said.

“You can’t possibly disregard the argument that the intention is to go ahead with the merger,” Matsukawa said by phone Tuesday. “It’s highly likely a court will issue an injunction.”

Hirohito Kaneko, an M&A lawyer in Tokyo, disagrees. As this is a public share offering and not, for instance, a third-party allotment where shares are issued to designated investors, only board approval is required, he said. One reason a judge may issue an injunction would be if the new shares were priced too low. The price of the new issuance hasn’t been announced yet.

“I don’t think the family can stop this,” Kaneko said.

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