The more things change the more they stay the same in the land of the rising sun. Power-switching manufacturer Nemic-Lambda came close to becoming a Japanese enigma when it dared to let a proxy issue emerge earlier this year. Nemic-Lambda made news when its corporate governance saga entered the public arena. Before that, Siebe, the UK-based majority shareholder with a 50.6 percent stake, was quietly working to oust Rikihiro Madarame, chairman of Nemic-Lambda. The UK conglomerate discovered that Madarame had received company funds for personal use and intended to do something about it.
‘There will definitely be more Japanese proxies, but they will not normally be like the aggressive fights you see in the US,’ says Ross Rowbury, director of Gavin Anderson & Co in Tokyo. ‘Companies will continue to try to solve their issues behind closed doors. With the increase in foreign shareholdings, Japanese companies will be more accountable to shareholders and corporate governance issues will arise.’ Nemic-Lambda epitomizes this movement.
Lines drawn
The battle lines in this proxy fight were drawn between two formidable companies. Founded by Madarame in 1970, Nemic-Lambda is a top producer of power-switching equipment and consolidated sales in the year ended March 1998 reached ¥28.5 bn. Nemic-Lambda’s shares trade on the first section of the Tokyo Stock Exchange. For its part, Siebe is one of the UK’s largest diversified engineering groups, encompassing over 200 companies and some 55,000 employees. The group generated pre-tax profits of £486.4 mn on turnover of £3.7 bn for the year ended April 1998. Nemic-Lambda was merged into Siebe in 1996 when the group bought UK-based Unitech, majority owner of Nemic-Lambda. But some, it seems, were not happy with the new ownership.
When Madarame discovered that Siebe would not tolerate his financial transgressions, he decided to issue 6.5 mn shares, worth $69 mn, to dilute Siebe’s majority stake to 38.4 percent. Madarame argued that the capital was needed to fund the development of a super-capacitator and a transformer. This claim was strongly opposed by Siebe and a court injunction in Tokyo was sought to stop the offering. After a public shaming by a local judge, Madarame stepped down and a new board of directors was elected at the annual meeting on June 30, 1998.
The events leading up to the Nemic-Lambda/Siebe confrontation involved so many moves that even a seasoned chess player would have found it difficult keeping track; and yet the cultural and geographic gaps only added to the complexity. The battle made news for some key reasons.
First, atypically for a Japanese company, the majority owner of Nemic-Lambda is a foreign entity. Second, meaningful proxies are practically unheard-of in Japan. Third, this was the first time a Japanese court overturned a third party share allotment on the basis that it was an attempt to dilute the power of a shareholder. Finally, the company’s employees called for Madarame’s resignation in a demonstration in Japan.
Corporate governance Japanese style would have usually meant Madarame’s resignation at the first hint of scandal leaking out. Instead, it took public shaming by peers, employees, the press and the courts. Following the ‘amicable’ settlement reached by Madarame and Siebe, the former founder retrieved and sold his holdings to Siebe.
‘The whole issue attracted a lot of attention because the Japanese judiciary system was being watched very carefully,’ says Barry Francis, director of public relations at Siebe and the group’s spokesman on the Nemic-Lambda affair. ‘Had a backdoor takeover been permitted, it would have sent a very strong message to people thinking of investing in Japan or those with majority holdings in Japanese companies. Namely, their investments are not worth very much. Nonetheless, we got the resolution we wanted, but it was unnecessarily protracted.’
Despite the un-Japanese nature of its foreign ownership and the public display of its dirty laundry, Nemic-Lambda did not pursue the typical proxy ending. The company preserved a part of its Japanese heritage by choosing a more traditional solution. Before Madarame destroyed all his self-respect, he resigned and the company stopped the proxy. However, observers say that due to the protracted battle the damage to Madarame’s character is beyond repair.
‘It is unusual to even have a battle like this at a Japanese company,’ says Marc Goldstein, global analyst at Institutional Shareholders Services (ISS) in Maryland. ‘Siebe owned the majority of the shares, but it kept the original management in place. This created the potential for conflict. Ironically, if Siebe had acted like the 19th century colonial power Madarame accused it of being, this struggle would not have arisen.’
Power to the people
What made this case particularly interesting was the anger of Nemic-Lambda employees. The court decision and resignation were preceded by a period of increased tension between employees and management. In an unprecedented show of opposition, 375 of 400 employees demanded Madarame’s resignation. As it turned out, Siebe was indirectly warned of Madarame’s activities by Nemic-Lambda employees. After Siebe undertook a preliminary investigation the internal audit found that the allegations might be correct.
‘If Nemic-Lambda had not had external foreign shareholders, which is rare for Japanese companies, the employees would never have been able to take their suspicions to the board,’ comments Rowbury. ‘In essence, it was an issue that found employees pitted against management. Madarame was a good venture capitalist and brought the company from a single factory to a major listed company. But once he sold shares he had to deal with his employees and be accountable to his shareholders.’
After Madarame was presented with the findings of the investigation he was asked to resign. However, upon the advice of his lawyers Madarame decided to fight. At this point, the battle left the confines of the Siebe and Nemic-Lambda offices and entered the public domain in a mud-slinging that became very un-Japanese. Madarame’s primary defense was that this was a cultural clash between an aggressive 19th century colonial power bent on beating the local hero. Siebe contended it was nothing of the sort and noted that the company had operated in Japan for almost 20 years.
‘As far as we were concerned, it was a straightforward corporate governance issue,’ maintains Francis of Siebe’s perspective. ‘We could not let it go on. We had a fiduciary duty to our shareholders and to Nemic-Lambda shareholders, since it was a quoted company. We are always very sensitive to local cultures and our overseas companies are always managed by locals. They know their country, culture and market better than we do.’
Court report
Siebe took the next step of going to the courts to request the documentation needed by auditors to establish beyond doubt that the funds had been taken. The court agreed. In addition, Siebe asked that the court appoint an independent investigator to review the matter.
Madarame fought on. At this time, Siebe believed it had the majority support of the Nemic-Lambda board. Nonetheless, Madarame managed to turn one board member around, causing Siebe to lose control of the board despite its majority shareholding. During this power struggle, Madarame convinced the board to issue additional shares and place them with friendly shareholders at a substantial discount, thereby diluting Siebe’s stake.
Siebe immediately went to court again, this time requesting an injunction against the dilution process. Siebe claimed the share issue was intended to stop it pursuing its action against Madarame.
At the same time, Siebe put forward an alternate board of directors to be voted on at Nemic-Lambda’s annual meeting on June 30 this year. The proposal was placed on the agenda by Lambda Holdings Inc, a unit of Siebe which owns 40.62 percent of Nemic-Lambda’s shares. Another Siebe unit, Lambda Far East, owns around 10 percent. On the list of potential board members up for election were ten employees from Siebe or affiliated companies and six line managers at Nemic-Lambda.
Sham alert
In a landmark decision on June 11 the court came back with a blistering judgement against Madarame. The judge agreed with Siebe that Madarame’s scheme was a sham undertaken purely to dilute Siebe’s shareholding. He stated that there was no corporate requirement for the funds. The judgement noted that since Madarame’s investment proposal was a desktop plan, it had no basis in reality and was unlikely to succeed. Madarame’s proposed share issue was legally scotched.
‘The court ruling against Nemic-Lambda is significant in that a Japanese court sided with the foreign majority owner,’ comments Goldstein. ‘Madarame portrayed the battle as a struggle between the heartless Anglo-Saxon way of doing business and the more compassionate Japanese business ethic. This is a tactic you would take if you were in the wrong but wanted to inflame nationalist sentiment. However, the court didn’t buy it, and neither did Nemic-Lambda employees.’
Although proxy cards were sent out to shareholders asking them to vote on the proposed board, the vote was not actually taken since Madarame and his followers resigned a few days before the annual meeting. The official statement was that Madarame stepped down to devote more time to personal and other business interests. Following Madarame’s departure, Hironori Shimamura, vice president, assumed control until the new president, Mitsuji Kyozuka, was elected by shareholders (see Power behind the punch, right).
‘The case of Nemic-Lambda is a memorable one in terms of Japanese corporate governance,’ comments Yoshiko Sato, program director and senior research fellow at the Japanese Investor Relations Association (Jira). ‘The investor relations infrastructure, including that of corporate governance, has not been established in Japan. We must first introduce a solid disclosure system that will be appreciated internationally, and then we can make publicly-listed companies much more accountable. But all of this will take time.’
