(BUSINESS WIRE)--Kaname Capital LP ("We") announces that it filed a shareholder derivative action today in the Tokyo District Court against the directors of Fukuda Denshi Co., Ltd. (6960.T) ("Fukuda Denshi"), one of our portfolio companies.

Kotaro Fukuda, the second generation of Fukuda Denshi's founding family and chairman ("Chairman Fukuda"), has held the position of representative director for nearly 40 years and has privatized the company to secure his own interests. At the same time, he has neglected the interests of other stakeholders, including Fukuda Denshi's employees and minority shareholders.

To date, we have communicated our concerns as shareholders to Fukuda Denshi's representatives and have repeatedly requested meetings with Chairman Fukuda himself and the outside directors who are in a position to provide oversight. However, Fukuda Denshi has not effectively addressed our concerns, nor did they agree to any of the meetings we requested with these individuals. As a result, we have decided to file a shareholder lawsuit against Chairman Fukuda and others, demanding compensation for damages of approximately 54 billion yen inflicted on Fukuda Denshi.

The illegal acts of Chairman Fukuda and others that we allege in this lawsuit are the following three points.

1. Arbitrary payment of high compensation

  • Chairman Fukuda continues to hold the authority to determine the amount of remuneration for directors, and he alone determines the amount of individual remuneration for each director, including himself.
  • Chairman Fukuda's total compensation increased from 136 million yen in the fiscal year ended March 31, 2015 to 434 million yen in the fiscal year ending March 31, 2023, a threefold increase.
  • The increase in Chairman Fukuda's remuneration began to coincide with the period when profit transfers through the companies owned by the founding family, discussed below, ceased, and it is suspected that Chairman Fukuda was attempting to supplement his own take-home pay by increasing his executive remuneration.
  • Chairman Fukuda's current remuneration is remarkably high compared to other companies in the same industry, and it is not a level that can be justified by improved business performance during this period.
  • On the other hand, employee salaries have remained virtually flat  until the COVID pandemic, despite improvement in business performance. Only recently, in response to rising prices, have wage increases of about only 4% to 5% per year finally been implemented.
  • Fukuda Denshi has also not established any objective standards for the amount of remuneration for directors, and we believe that the arbitrary determination of remuneration by Chairman Fukuda is an illegal violation of the Companies Act.

2. Improper profit transfer through a company owned by the founding family

  • Since around 1964, Fukuda Denshi has continued transactions with Atomic Sangyo, Inc. ("Atomic Sangyo"), a company owned by the founding family, to receive supplies of recording paper and other materials used in electrocardiographs and other devices.
  • Despite the fact that this transaction constituted a conflict of interest, Fukuda Denshi did not obtain any approval from the Board of Directors, which is required under Japan's Companies Act.
  • Atomic Sangyo, despite being lightly equipped and operated with a small number of employees, generated operating income of around 500 million yen each year (operating income margin of around 30%).
  • Fukuda Denshi was effectively transferring profits to the founding family by purchasing recording paper and other products from Atomic Sangyo at high margins.
  • In May 2015, Fukuda Denshi's board of directors decided to make Atomic Sangyo a wholly owned subsidiary of Fukuda Denshi and, in consideration, to deliver to the founding family shares of Fukuda Denshi equivalent to a total of approximately 26.5 billion yen at the then current market value.
  • We believe that these transactions are an illegal transfer of Fukuda Denshi's assets to the founding family.

3. Allotment of shares to the founding family foundation under the pretext of social contribution activities

  • In May 2016, Fukuda Denshi allocated Fukuda Denshi shares with a market value of approximately 900 million yen at that time to the Fukuda Denshi Foundation through a trust bank, effectively free of charge, in order to support the social contribution activities of the Fukuda Foundation for Medical Technology ("the Foundation").
  • At that time, Fukuda Denshi explained that the trust bank would not exercise voting rights with respect to the allocated shares.
  • However, around 2020, the trust agreement was terminated and the Foundation began to own the shares in its own name. After that, the Foundation has exercised its voting rights every year in full support of the company's proposal and in full opposition to the shareholder's proposal.
  • We believe that this allotment of shares was actually made for the purpose of increasing Fukuda Denshi's stable shareholder base, and falls under the category of profit sharing prohibited by the Companies Act.

If our company prevails in this lawsuit, the damages allowed by the court will be paid to Fukuda Denshi. We hope that the unjustly diverted profits will be returned to Fukuda Denshi so that Fukuda Denshi can use the funds to improve the treatment of its employees and to implement other measures to enhance the value of the company. We believe that it is our responsibility as investors to correct the misconduct of Chairman Fukuda and others through this lawsuit and to protect its employees, minority shareholders, and other stakeholders.

Toby Rodes, our Chief Investment Officer, commented as follows.

"Fukuda Denshi is a very important company which supports the medical field in Japan. In recent years, after the COVID disaster, the company's performance has improved thanks to the efforts of its employees. Unfortunately, the personalization of the company by Chairman Fukuda is undermining its value. We sincerely hope that Fukuda Denshi will adopt the kind of governance that will turn the efforts of its employees into market confidence."

We hope that relevant stakeholders will work together to raise their voices to improve the governance of Fukuda Denshi. We welcome any comments or suggestions you may have and welcome you to contact us at contact@kanamecapital.com.

About Kaname Capital

Kaname Capital is a Boston-based investment management firm specializing in long-term investments in Japan-listed equities. Kaname Capital's slogan is "actions speak louder than words," and we expect companies to steadily implement measures to enhance their value, rather than just offer explanations. Kaname Capital aims to encourage the realization of potential corporate value through dialogue with investees, and does not wish to be confrontational with them. Kaname Capital has also stated its acceptance of the "Principles for Responsible Institutional Investors" (Japanese version of the Stewardship Code) established by the Financial Services Agency, and conducts its investment activities in accordance with these principles.

https://www.kanamecapital.com/

Disclaimer

This press release is for informational purposes only regarding the legal proceedings brought by Kaname Capital. Kaname Capital is not soliciting the purchase or sale of any securities or investment products, nor is it providing investment advice. Kaname Capital makes no representation or warranty as to the accuracy, completeness or reliability of the information contained in this press release. The information contained in this press release is solely the opinion and assessment of Kaname Capital.

The original source-language text of this announcement is the official, authoritative version. Translations are provided as an accommodation only, and should be cross-referenced with the source-language text, which is the only version of the text intended to have legal effect.

Contact: Kaname Capital LP contact@kanamecapital.com