Toyota Industries privatisation - A governance test Japan cannot afford to fail

The proposed privatisation of Toyota Industries Corporation (TICO) by the Toyota Group is being billed as a landmark in Japanese corporate history—a transaction that could, at face value, untangle decades of strategic-shareholdings and herald a new era of capital efficiency and governance. Yet, beneath the surface, the deal exposes the persistent frailties of Japan’s corporate governance regime and the enduring power of entrenched interests. For minority shareholders, global investors, and advocates of reform, the TICO takeover will serve as a referendum on the credibility of Japan’s governance revolution.

The Deal: Structure and context

The structure of the deal is as intricate as a kabuki plot. A new holding company will be set up with unlisted real estate company Toyota Fudosan investing ¥180 billion and Akio Toyoda, the Chair of Toyota Motor Corporation (Toyota Motor), investing ¥1 billion. Toyota Motor will invest ¥700 billion for non-voting preferred shares. This bid to take TICO private involves a labyrinthine structure with a headline offer price of ¥16,300 per share. The stated aim is to dissolve the web of mutual holdings that have long defined the Toyota group, streamline decision-making, and align incentives for a more agile and transparent future.

This is not merely a financial transaction; it is a strategic realignment that, in theory, should please reformers. After all, Japan’s post-war keiretsu system—a type of business network characterized by a group of companies with close relationships and shareholdings—has been widely criticised for stifling market discipline, diluting accountability, and suppressing shareholder value ¹. The Tokyo Stock Exchange (TSE) and the Ministry of Economy, Trade and Industry (METI) have, in recent years, pushed for the unwinding of strategic shareholdings to increase capital efficiency, as part of a broader governance overhaul.

Yet, the devil is in the details. And in this case, the details have left minority shareholders and governance advocates with more questions than they currently have answers to.

Various stakeholders: Who benefits?

It is tempting to see the deal as a one-sided affair, but the reality is more nuanced. For Toyota Motor shareholders, the unwinding of strategic shareholdings reduces the passive voting of proxies across the Toyota group. The liberation of cross-held shares² frees up capital for growth investments and shareholder returns within the group, potentially supporting Toyota’s ambitions to transform itself into a mobility company as well as its foray into software-defined vehicles (SDVs). The preferred shares, yielding an attractive 8.5% dividend, are seen by some Toyota Motor shareholders as a reasonable investment. From a business perspective, potential synergies from the transaction, which Toyota Motor have so far left undefined, are less clear. 

However, for TICO’s minority shareholders, the qualitative and financial implications are less positive. The offer price, while representing a premium to historical averages, is an 11% discount to the last closing price before the announcement and sits below the midpoint of the special committee’s own discounted cashflow (DCF) valuation range. It is also significantly below the 44% average privatisation premium for subsidiary conversions according to TSE data³. The proposal’s structure and process have left many shareholders feeling short-changed, with the benefits of capital liberation accruing disproportionately to the controlling group. 

The governance shortfall: A critical appraisal

1. Opaque process and inconclusive negotiation 

The process that led to the deal’s terms is, by any international standard, a study in opacity. The Special Committee appointed by TICO’s Board and tasked with representing minority shareholders achieved only an 11% price increase over the initial offer and ultimately adopted a “neutral” stance on the transaction. This neutrality—ostensibly justified by a media leak that moved the share price—has left shareholders with concerns over the fairness of the offer amount and a potentially conflicted transaction. The committee failed to provide a robust, independent fairness opinion, nor did it disclose the details of its internal deliberations or disagreements. 

No details of an independent valuation or fairness opinion have been disclosed by TICO’s board. While fairness opinions are recommended rather than legally required in Japan, both METI’s Fair M&A Guidelines and the TSE’s Code of Corporate Conduct indicate that obtaining a fairness opinion is considered best practice—particularly where there are conflicts of interest or significant minority shareholder interests at stake.

2. Valuation: A black box approach 

The deal’s valuation methodology is equally troubling. This document, published by the TSE Listing Department on 18 February 2025, details the revised requirements for opinions on fairness, special committee procedures, and enhanced disclosure for transactions involving conflicts of interest, such as management buyouts and subsidiary conversions. 

There is no disclosure in the TICO announcement of the financial projections, discount rates, or tax assumptions underpinning the offer price. Critically, the valuation appears to exclude the market value of TICO’s strategic-shareholdings, real estate, and vendor finance business—assets that, if properly accounted for, would materially increase the company’s intrinsic value. The independent financial advisers engaged for the transaction themselves appear conflicted, being closely linked to the group’s lending banks and reliant on management-provided assumptions ⁴.

This lack of an independent, transparent valuation is more than a technical failing; it is a breach of the governance reforms Japan’s agencies have spent years rolling out. METI’s own guidelines, as well as the TSE’s revised code which come into force from July this year, call for enhanced disclosure and fairness in takeovers—standards that the Toyota Group would have had to comply with if the deal been announced a month or so later. 

Proponents of the deal point to the offer’s premium over historical share prices. Yet, this is a mirage. As mentioned above, the offer price represents an 11% discount to the last closing price before the announcement and is reportedly below the midpoint of the Special Committee’s own DCF valuation range. At Toyota Group’s official briefing, many investors raised questions of Toyota’s management on how intrinsic value had been assessed and would be realized. In an investor survey of the Asian Corporate Governance Association (ACGA) Japan Working Group (JWG) members, the feedback was that the said valuation excludes market value of TICO’s cross shareholdings, real estate, and vendor finance business, thus leading to perceived undervaluation. Despite numerous calls from investors seeking Toyota to disclose how it derived the intrinsic value, this has not been shared.

The deal structure also caps the price for post-tender buybacks of Toyota Group shares, ignoring the possibility of further price appreciation before the transaction closes. The deal faces a gauntlet of antitrust and regulatory approvals across multiple jurisdictions, yet there is no clear plan for updating the valuation if the process drags into 2026.

3. ‘Majority of Minority’: A flawed safeguard

Perhaps the most egregious governance failing is the manipulation of the majority of minority safeguard. Toyota argues that all it needs is 42% support from minority shareholders to finalize the takeover bid (TOB). This is based on the company’s view that other TICO shareholders—Denso, Aisin and Toyota Tsusho (all Toyota Group entities)—are counted as independent minority shareholders. This raises serious questions about the legitimacy of the majority of minority rule and its interpretation. 

In theory, this mechanism is meant to protect genuine minority shareholders by requiring that a majority of them approve the resolution. In practice, the definition of “minority” has been stretched to include Toyota affiliates—entities with clear conflicts of interest and a vested stake in the outcome. As a result, the threshold for approval by true outside shareholders is perilously low, diluting the very protections the rule was designed to provide.

4. Board independence and fiduciary duty

The TICO Board’s formal approval of the tender offer, at a price widely viewed as inadequate, raises serious questions about its independence and commitment to minority shareholders. The board has failed to provide any detail of an independent valuation reflecting the market value of TICO’s assets, and has adopted a neutral stance rather than a robust recommendation for or against. It is important to recognize that corporate boards often consider a wide range of factors when making decisions but this stance, given the concerns regarding the proposal, does indicate a possible reluctance to challenge the controlling shareholder. This is precisely the kind of behaviour Japan’s governance reforms were meant to eradicate.

It is the responsibility of directors to provide a clear recommendation to shareholders. Whilst the METI guidelines provide for “exceptional” circumstances, the process coupled with the opacity of the valuation raises questions around whether the “neutral” stance aligns with their fiduciary duty to protect shareholders interests. Independent directors are expected to have the interests of minority shareholders in mind and should possess relevant expertise to be able to assess transactions such as this one. In the case of TICO, we note that the current roster includes an academic, an insurance expert, and a banking and gender diversity expert, but lacks individuals with relevant industrial expertise who could constructively challenge the executive team and Toyota representatives ⁵. The revised guidelines for corporate governance systems released by METI ⁶ specifies that if evaluation in the capital markets is a key issue, it would be appropriate to appoint an individual with experience in capital market-oriented management. This appears to have been lacking on TICO’s board and absent in the evaluation process. 

5. Synergies priced at zero

The bid document mentions this privatisation could bring about significant synergies due to group consolidation; however, no dollar value has been expressed as assigned to any synergies, ostensibly due to lack of certainty. The lack of disclosed synergy estimates in the transaction could indicate that potential benefits will not be shared with minority shareholders, raising concerns about fairness. Additionally, without specific quantitative data, it is unclear to investors to what extent the proposal enhances the corporate or shareholder value for either company.

6. Stakeholder protections and market integrity

There are other concerning parts of this proposal. For example, Toyota Motor is investing ¥700 billion for preferred shares with no voting rights and, as noted above, with little information provided as to how Toyota intends to generate synergies from this deal (Toyota Motor argues that special dividends yield 8.5% which makes it an attractive investment). The governance failing also lies in Chairman Akio Toyoda’s dual role as architect of the deal and investing ¥1 billion personally in the acquisition vehicle while chairing Toyota Motor. Without demonstrating robust independent safeguards, this appears to breach the spirit of METI’s Fair M&A Guidelines (Section 3.2), which mandate "strict segregation of conflicted parties from decision-making" and "independent validation of transaction terms."

Beyond the technicalities, the deal is counter to the spirit of Japan’s corporate governance code and the country’s reputation as a market protective of investors’ interests. The board’s failure to protect minority interests, the flawed majority of minority mechanism, and the lack of a credible fairness opinion all signal that, despite years of reform, the interests of insiders can still trump those of outside investors. This risks not only litigation and appraisal rights claims but also long-term damage to Japan’s capital markets and its appeal to global capital. 

Regulatory and policy backdrop

Japan’s corporate governance reforms have, in recent years, made real progress. The unwinding of strategic shareholdings, the rise of independent directors, and the push for greater transparency have all contributed to improved capital efficiency and rising valuations for Japanese companies. The table below outlines some cases where METI Guidelines for Corporate Takeovers of August 2023 have made a tangible difference.

Table 1: Examples of corporate M&A after METI guidelines of August 2023