CVC Capital's bid for Toshiba exposes pervasive conflicts of interest

Nikkei -- Apr 13
The reported $20 billion bid to take Toshiba private from U.K.-based private equity fund CVC Capital Partners has the investment community abuzz: Will CEO Nobuaki Kurumatani actually be allowed to pull it off and escape the nets that are encircling him?

There is no way the timing of CVC's offer, on the heels of a shareholder vote to appoint independent investigators to review alleged vote tampering at last year's annual general meeting, is a coincidence.

A going private transaction -- if it can be accomplished quickly enough -- will effectively shut down the investigation and leave the world forever guessing at whether Kurumatani and other members of Toshiba senior management engaged in misconduct. It will also relieve Kurumatani from having to face reelection at the coming AGM in June, after having eked out a slim 57% margin at last year's contested AGM.

The identity of the bidder is a further reason for raised eyebrows. CEO Kurumatani served as President of CVC's Japan unit immediately prior to assuming office at Toshiba. Kurumatani's confidant and former Lixil CEO, Yoshiaki Fujimori, currently serves as a Toshiba director and special adviser to CVC.

Given the context and relationships, it seems unlikely that CVC's bid came out of the blue. The more plausible scenario is that it was solicited by Kurumatani to save his own skin. At one end of the spectrum of possibilities, one can imagine a tacit quid pro quo between Kurumatani and his former employer: a senior management role and equity in the privatized entity for Kurumatani in exchange for his help steering the deal in CVC's direction at a favorable buyout price.

The conflicts of interest between Toshiba management and shareholders are palpable. Yet Toshiba has shown itself remarkably tone-deaf to conflicts. To take the most recent example, Toshiba's shareholders voted for an independent investigation of last year's AGM in large part because the internal review by audit committee members who themselves were candidates in the contested election raised more questions than it answered.

How Toshiba addresses the obvious conflicts will be a fascinating test of the current condition of corporate governance in Japan. As a threshold issue, will Kurumatani and Fujimori be required to recuse themselves from negotiating with CVC? Will the terms of any compensation or equity participation for them in a privatized Toshiba be fully disclosed and vetted for fairness by a reliably objective process?

Even more significant and complex, will Toshiba take the CVC bid as the occasion to put itself up for auction to the highest bidder, one that may not be interested in Kuramatani's services post-acquisition? The conventional corporate law answer, echoed in the Ministry of Economy, Trade and Industry's own fair M&A guidelines, is that competing bids should be invited to ensure shareholders get the best price possible.

But whether Toshiba should be put on the block for auction is complicated by the fact that it is a designated national security asset. Sale to a foreign fund like CVC will require METI's approval under the Foreign Exchange and Foreign Trade ACT (FEFTA).

That METI itself will necessarily play a deciding role in Toshiba's fate puts in the headlights METI's split personality as it relates to corporate governance generally and to Toshiba in particular.

- Nikkei