Takeover defense measure

In general, the existence of a potential acquirer benefits minority shareholders by strongly incentivizing board members and management to increase the corporate value and the stock price, and further disincentivizing mismanagement. This is particularly relevant in the case of GMO Internet, where a very large shareholder exerts, in our view, excessive control of the company. GMO Internet founder Mr. Kumagai holds 40.86% of voting rights. 

GMO Internet did not obtain shareholders’ approval when introducing a takeover defense measure in 2006.  Moreover, their takeover defense measure does not require shareholders’ approval when being put into effect. Thus, GMO Internet's takeover defense measure is particularly abusive. 

We believe that GMO Internet's takeover defense measure as it is currently structured prevents shareholders' will from being reflected, and therefore is contrary to guidance indicated in “Policy Concerning Takeover Defense Measures to Ensure or Improve Corporate Value and Common Interests of the Shareholders” published by the Ministry of Economy, Trade and Industry and the Ministry of Justice as of May 27, 2005, and the “Corporate Governance Code - Sustainable Corporate Growth and Medium-to-Long Term Improvement of Corporate Value” (“CG Code”) published by Tokyo Stock Exchange, Inc. on June 1, 2015.

In addition, we doubt the independence and effectiveness of GMO Internet's special committee for the takeover defense measure, whose role is to make decisions independent from the Board of Directors in the case of an acquisition offer. In particular, two out of four members of the special committe (Mr. Kinoshita and Mr. Ogura) were former corporate auditors of GMO Internet, one member (Mr. Ogura) currently serves as a Board  director and member of the audit and supervisory committee, and one member (Mr. Masuda) currently serves as an external Board director and member of the audit and supervisory committee.

According to Mr. Kumagai’s past interviews with multiple media outlets, he has in his sole discretion declined several offers to acquire GMO Internet, including an offer from an overseas fund to acquire the Company for JPY50 billion when the Company faced serious risk of becoming insolvent due to overpaid claims associated with Orient Credit Co., Ltd. This was obviously an unauthorized performance by Mr. Kumagai, notwithstanding his ownership at the time of 47.70% of voting rights as well as his role as a Representative Director, Chairman and President of the Company.

Moreover, in the interviews, Mr. Kumagai explained that his "promises made to his colleagues, his dream and his faith" were the reasons for rejecting the offers. However, as a result of this judgment, minority shareholders were heavily disadvantaged and harmed. As is apparent from the chart below, it took GMO Internet more than five years to trade above the JPY50 billion level we believe investors could have received in 2007.

Therefore, we are very concerned that minority shareholders have missed a number of attractive opportunities offered by potential acquirers, after and in addition to the aforementioned case, as a consequence of Mr. Kumagai’s sole discretion, or as a result of decisions made by the Company in consideration of Mr. Kumagai’s interests.

Source:  Bloomberg   Note:  Market data as of Jan-18  -2018.

Source:  Bloomberg   Note:  Market data as of Jan-18-2018.

Weak governance structure

Oasis believes that a weak governance structure is another key reason behind GMO Internet's secularly undervalued stock price.

In fact, GMO Internet is valued at less than the value of the stake the Company owns in its listed subsidiaries (GMO Payment Gateway, Inc., GMO Financial Holdings, Inc., GMO CLOUD K.K., GMO Pepabo, Inc., GMO Media Inc., GMO Research, Inc., GMO TECH, Inc. and GMO AD Partners, Inc.). The valuation implies that the market gives a negative value to the Company’s operating businesses, which includes a cryptocurrency mining business. As one of the Company's largest shareholders, we are not able to tolerate this. Board members and Company management should be held responsible.

Source:  Company disclosure and Bloomberg   Note:  Market data as of Jan-18-  2018.

Source:  Company disclosure and Bloomberg   Note:  Market data as of Jan-18-2018.

Even though the Company’s stock price has rallied recently on expectations for its new cryptocurrency mining business, current operations are disappointing. In the third quarter of fiscal year ending December 2017, the Company only achieved operating profit was 63.1%, current profit of 63.6%, and net income of 47.3%.  

Furthermore, despite the disappointing business performance, according to GMO Internet’s Investor Relations team as of October 2017, Mr. Kumagai has not taken a meeting with shareholders -- an obvious failure of accountability to shareholders as a Representative Director and President of the Company.

It appears that the majority of minority shareholders voted against to Mr. Kumagai’s re-election to the Board of Directors in the latest general shareholder meeting on May 10, 2017. Oasis believes this means that minority shareholders expect GMO Internet to substantially improve its governance structure, including an effective assessment of Mr. Kumagai's performance.

Source:  Company disclosure   Note:  Assumes Mr. Kumagai has voted for to all the candidates including himself with his and his asset management company’s voting rights.

Source:  Company disclosure   Note:  Assumes Mr. Kumagai has voted for to all the candidates including himself with his and his asset management company’s voting rights.

Regarding GMO Internet’s flawed governance structure; first, Mr. Kumagai has an effective control over election votes of the Company’s Board of Directors at general shareholders meetings, as he controls 40.86% of voting rights, despite this being one of the few governing body decisions upon which minority shareholders can exert influence.

Furthermore, for the Board of Directors to function effectively, both the decision-making function and the supervisory function are important, especially for a company like GMO Internet, where the authority is substantially focused with Mr. Kumagai. However, it appears that the current Board of Directors, with only three outside directors among 19 directors, is not separating supervision of management and execution functions, and is not maintaining effective supervision over Mr. Kumagai, who serves as a Representative Director and President and also performs as a Chair of the Board.

Lastly, according to disclosures from GMO Internet, Directors' compensation has been determined by increasing or decreasing at a set rate based on quantitative and qualitative target-setting and the evaluation of the level of achievement of such targets. However, it is unclear to shareholders what those targets are, how those targets are set, and how evaluations are carried out. Under the current governance structure, it is doubtful that these processes are carried out in alignment with the interests of minority shareholders