(Above Toyota President, Akio Toyoda, is pictured)
In a radical departure, Toyota is offering investors five-year shares designed to match the long-term needs of its R&D.
Toyota believes that developing the next generation technologies will require massive investments over many years. It also believes that the current state of investment practices, the prevalence of roaming funds and the general emphasis on short-term stock prices, all work against the required investor stability for such long-term undertaking.
“As a result, we have determined that, in raising capital for research and development of next generation technologies, it is desirable to match to the extent possible the period in which investments in research and development contribute to our business performance with the period in which investments are made in us by investors. To that end, we have decided to issue the First Series Model AA Class Shares with voting rights and transfer restrictions that assume a medium to long term holding period,” Toyota states.
Faced with an influx of international investment, shareholders in Toyota Motor Corp rebuffed foreign fund managers and approved a plan to bolster the ranks of the car maker’s domestic stakeholders. In a historical vote on June 16th 2015, Toyota shareholders adopted with a 75 per cent majority the proposal to issue Model AA Class Shares. The Model AA Class shares, named after Toyota’s first passenger car, resemble convertible bonds. These shares will be sold only in Japan; they will not be listed, but will have voting rights. They will be priced at 120 per cent of the ordinary shares and will be paid a dividend at a rate lower than ordinary shares but at an increasing rate every year. The company will commit to buy back the shares at the original price after five years. “This shows how the management wants to build corporate value over five years together with shareholders,” Toyota President Akio Toyoda said.
But at that time, holders of these shares will have the option of converting their shares into ordinary common shares at a conversion ratio yet to be determined.
Toyota will thus enlist the support for at least five years of patient shareholders, mostly Japanese retail investors, in order to pursue fundamental research into future technologies. It will raise an initial US billion and is authorized to issue up to US2 billion of these shares for that purpose. If that endeavour is successful, all shareholders will benefit; of course, the impatient and the fickle may miss out.
The plan allowing Japan’s biggest publicly traded company to issue up to ¥500 billion ( billion) of the shares similar to convertible bonds drew opposition from some foreign investors. The shares, sold only in Japan, won’t be listed, but will have voting rights.
Around 75% of the shareholders who voted backed the proposal, a Toyota spokesman said, a move widely expected by analysts because of support from major shareholders.
The move underscored the difficulties of effective shareholder activism at a company like Toyota, where many of its biggest shareholders are insiders including group companies. Not a single proposal by management has been turned down by shareholders since the company’s inception back in 1937.
“Issuing these class shares would offer more options for our shareholders,” Mr. Toyoda told shareholders attending the meeting at Toyota’s headquarters in central Japan. “We are taking a small step to make capital markets (in Japan) more active by widening our range of offerings.”
The proposal had drawn opposition from foreign proxy adviser Institutional Shareholder Services Inc. and California’s pension giant known as CalStrs. ISS said such a move would lead to more docile and silent shareholders, while CalStrs said the proposal would hinder efforts by investors outside of Japan to obtain the stocks.
It also drew questions from shareholders attending the meeting, including how these new class shares could help improve corporate governance when shareholders are essentially prevented from expressing their opinion by selling off the stake they own.
All in all, the Toyota innovation should be closely examined by all who believe that currently dominant capital structures open the door wide to all types of stock market agitators and tourist investors. It is an empirical fact that these sorts of “shareholders” pressure management and boards of directors to deliver quick boosts in stock price, even if it means cutting down on R&D and capital expenditures. Toyota is thinking “out of the box.”