2. What were T. Boone Pickens motives when he bought the share?

As the largest shareholder of Koito Manufacturing, is he entitled to representation on the board, does Japanese law allow for that? If not what in the law could he use to get an equivalent result? Greenmailing is the practice of purchasing enough shares in a firm to threaten a takeover and thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover. We can suppose that Pickens attempted to greenmail Koito as it is mentioned in the case The high price Mr. Pickens allegedly paid for his stock *+ added to the suspicion that he intended to greenmail Koito. Moreover, Pickens was known as an aggressive, tenacious, and generally hostile bidder for corporations. Pickens was the largest shareholder of Koito. According to the US corporate governance custom and convention, Mr. Pickens was entitled to representation on the board. But, because of a voice vote at the 1989 annual meeting, Pickens was denied board representation. Thus, the Japanese low did not allow for a representation on the board. Nevertheless, according to special shareholders rights, he could use certain rights to get an equivalent result as follows: 1. With 1% ownership or more could add items to the agenda at shareholders meetings. 2. With 3% of the stock could call a special shareholders meeting (at their own expense) and could apply to a court to remove a director. 3. With 10% holding for more than six months could allow a shareholder to inspect a companys accounting records and to apply to a court to appoint a special auditor for this purpose.

3. Besides board representation, T. Boone Pickens demanded higher dividend payouts. Were his demands justified? Provide quantitative evidence to back your answer. Is there anything in the Japanese commercial code that would allow Pickens to try to get more dividends? If yes, why doesnt he use this? If not, based on your experience as an international investment banker, what changes would you recommend him to propose? Lets analyze some figures for the period 1982-1989, before Pickenss claims on higher dividend payouts. Using the Exhibit 5, showing Koitos share data, we can notice an increase from 1982 to 1989 in earnings/share and cash flow/share. That almost moved share prices up, while dividends/share were relatively constant. These trends explain a decrease in dividend yield from 2,32% to 0,16%. So these figures could justify Pickens demand for higher dividend payouts. Nevertheless, looking at Exhibit 3, Koitos income accounts, we can see that from 1982 to 1989, net income and retained earnings were quite instable. Increase of dividends would have led to further decrease of retained earnings, shareholders equity and, ultimately, share price. Moreover, using the Exhibit 4, Koitos Balance Sheet, we can notice an increase in long-term liabilities (from 3,211 millions to 6,019 millions) and total liabilities (from 23,431 millions to 32,955 millions). An increase in dividends would have led to increase in debt-to-equity ratios that would have had a negative effect on Koitos business. Thus, after a thorough analysis of different data, Pickenss claims for higher dividends were not justified by the current situation in the company.

Nevertheless, according to the amendment of 1982 in the Commercial Code of Japan, the companies had to include 50% of the total issue price in paid-in-capital, immediately creating a larger based against which dividends must be paid. In this relation as well, special reserves which are not otherwise explicitly permitted by special laws and that are highly characterized as being for the retention of profits, was no longer be given the status of special reserves, but will be washed through taxable income and into the companys equity capital (http://www.japanlaw.info/lawletter/july82/nt.htm). This amendment would have given Mr. Pickenss an opportunity to claim for higher dividends. But he had no access to Koitos financial accounts to investigate the reserves that Koito had made. So, Pickens was not able to use that amendment in his favor. 4. Pickens accused Toyota of limiting profits earned by Koito Manufacturing. Explain how the mechanism works? Is this a self-dealing transaction? If Pickens gets access to financial information, how can he set out to prove his accusations? If you were an investment banker, what accounts or data would you tell him to scrutinize. Would you suggest to change the charter of the organization of Koito? How? To begin with, lets define a self-dealing transaction. Self-dealing occurs when there is a transfer of money or assets from the company to a dominant corporate owner, manager, or director, sales of goods or services to the company at inflated prices or purchases from it at excessively low prices, loans to or from the company on advantageous terms. According to the case, there was a special relationship between Koito and the Toyota Group. Toyota was Koitos largest customer (according to Exhibit 2, it accounted for 48% of Koitos sales) and its second-largest shareholder, with 19% of its stock. Thus, Toyota had the strongest influence on Koitos business. Lets explain the mechanism. Keiretsu, these industrial groups in Japan, were a perfect example of self-dealing. One of the main purposes of keiretsu is to spread costs among the member companies. Profit margins can be lower than they would be since highly profitable members of keiretsu must transfer capital to other less profitable member companies. Moreover, sometimes the main company in the keiretsu forces its supplier companies to sell their goods at a lower profit, and sometimes at a loss. As supplier companies rely on the main company for orders, they have no choice. Thus, these practices could have taken place in Koito relationships with Toyota. If Pickens gets access to financial information, he could compare the prices for Toyota, those for other customers and the averaged prices in the market. As an investment banker and according to our initial definition, I would advise him to scrutinize information concerning any loans provided on favorable for Toyota terms or any transfers of assets between Toyota and Koito. He could also look for any unjustified increase in accounts receivable: an evidence of Toyota trying to extend its payment period that is favorable to Toyotas financial cycle. In order to eliminate this practice of self-dealing, I would suggest changing the charter of the organization of Koito. For example, we could change the procedures of elections of board of directors. We could require independent directors on the board.