Corrects to remove ValueAct Capital from parties involved with governance campaigns at Toyota Motor in seventeenth paragraph. The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Hudson Lockett

HONG KONG, June 5 (Reuters Breakingviews) - Japan’s efficiency push has a new and conflicted flag bearer in the form of its largest listed company. Toyota Motor’s 7203.T resistance to the official drive to streamline corporate structures in pursuit of higher shareholder returns gave way this week to support for a $33 billion buyout of its supplier Toyota Industries 6201.T. The decision is controversial.

The move, on its face, lends the weight of the $250 billion automaker to a broadening wave of overhauls championed by the government, bourse operator Japan Exchange and others. They want conglomerates to unwind cross-shareholdings, estimated by Goldman Sachs to be worth up to 100 trillion yen ($700 billion), and winnow down the 200-odd subsidiaries or so-called “child” listings, among other measures.

The goal is to reduce conflicts of interest and ensure capital is employed productively so that Japan’s $4 trillion economy can grow even as its population shrinks. If M&A activity is any measure of Japan’s future metabolic activity, there is hope: the value take private deals from 2020-2024 totalled $66 billion, per Dealogic, compared to just $10 billion over the previous half decade.

However, much like the shakeup at Seven & i 3382.T, where streamlining only began in earnest after Canada’s Alimentation Couche-Tard launched takeover bid for the $40 billion 7-Eleven owner in August, Toyota Group’s restructuring is defensive, even if it isn’t reacting to a particular suitor.

The rejig, announced on Tuesday, reflects a broader desire among large, listed companies to get out ahead of both tightening regulations in Japan intended to protect minority shareholders and growing institutional momentum empowering activist owners.

Through a complicated and multi-stage deal, Toyota Motor will unwind its nearly 25% stake in Toyota Industries and replace it with illiquid non-voting preference shares in a new privately held company that will wholly own the supplier.

The new structure will keep Akio Toyoda, chair of Toyota Motor and grandson of the group’s founder, near the top of the Toyota Industries’ ownership structure with a miniscule equity stake. That chafes because shareholders gave him less than 72% of their vote at Toyota Motor’s annual meeting in 2024, his lowest level of shareholder support on record. Most crucially, the deal will keep Toyota Industries out of the potential reach of pushy activists now circling Japan’s many listed companies.

Instead of allowing market forces to unlock the value of Toyota Industries obscured by its 9% stake in Toyota Motor, Toyota Motor will provide the bulk of equity to fund a related real estate company launch a tender offer for Toyota Industries at 16,300 yen a share – an 11% discount to the stock’s closing price on Monday.

"Toyota is a blue chip — supposed to lead in governance — and here they present a value lacking transparency. The actual transaction is substantively different, with significant financial effects, and they say nothing about that”, said Travis Lundy, an analyst who writes for SmartKarma.

While Toyota Group has made some progress in recent years in unwinding crossholdings, its web of ownership remains a tangled skein compared to slimmed down peers like Sony 6758.T and Hitachi 6501.T. For instance, 80% of Toyota Fudosan, the real estate company behind the new take-private offer, is owned by five other Toyota Group businesses including Toyota Industries.

“Nothing much has changed in terms of governance at both companies in this horribly underpriced deal, except that public shareholders aren’t going to be in Toyota Industries' hair and pushing them around anymore,” said Nicholas Benes, CEO of The Board Director Training Institute of Japan. “Moreover, the company's minority holders are getting shafted.”

Toyota Motor in its deal filings says it believes that the delisting of Toyota Industries is expected to "accelerate the growth of the Toyota Group as a mobility company" and demonstrate "a clearer path toward enhancing the corporate value".

In sum, the dealings underscore how Japan’s value push is strong enough to force companies to change but sufficiently weak to allow them to act in self-interest rather than shareholders’. In the automaker’s case, the pressure to unwind cross shareholdings is simply spurring the creation of new protective structures.

Tokyo's problem is that it continues to rely on slow consensus building rather than sharp-toothed rules to bring about change. The fair M&A guidelines introduced in 2023, for example, are just that —guidelines.

The Toyota Industries buyout is moving forward just as a set of guidelines from the stock exchange take effect next month calling for better protection of minority investors during take-private transactions. These propose that companies on the receiving end of buyout proposals could consider requiring the approval of majority of minority shareholders but stop short of mandating it.

Debate over amendments to Japan’s companies act has mostly eschewed these more substantial considerations. If anything, the actions of Japan’s largest company highlight the reluctance of large listed groups to fully open the door to outsiders.

Toyota Motor was until recently also a key holdout in publishing a plan to enhance shareholder value in line with exchange guidelines, while concerns over its board’s independence were sufficient to spur a governance campaign from Glass Lewis in 2023.

Of course, critics of the automaker have been quieted more than once by its strong performance. The firm’s annualised total shareholder returns of 18% over the past five years safely outstrip Japan’s benchmark Topix by 4 percentage points. Impressive but nothing compared to Hitachi whose serious streamlining drive has helped deliver annualized returns of 44 per cent to shareholders over the same period.

Ultimately, those expecting Tokyo to fully embrace U.S.-style shareholder capitalism may be disappointed. Toyota Motor is in an exceptional position by virtue of its position at the heart of the country’s signature automotive sector, and its sheer size in terms of market capitalization. If Japan allows it to throw its weight around so easily, others will too.

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(Editing by Una Galani; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on LOCKETT/ hudson.lockett@thomsonreuters.com))