Hibiki Path Advisors Submitted Shareholder Proposals at the 53rd Annual General Meeting of Shareholders of Japan Pure Chemical Co., Ltd. Scheduled for June 25th, 2024

TOKYO–(BUSINESS WIRE)–Hibiki Path Advisors (hereinafter referred to as “Hibiki” or “we”), is an asset management company based in Singapore. Its business has focused on long-term investment management into Japanese small-cap equities for domestic and global clients. Through managing customer assets, Hibiki holds shares of Japan Pure Chemical Co., Ltd, (hereinafter referred to as “JPC” or “the company”), from the long-term investment perspective.

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Hibiki Path Value Fund, which has an investment management contract with Hibiki, has submitted shareholder proposals at JPC 53rd Annual General Meeting of Shareholders scheduled for June 25^th, 2024 (details of the two items are outlined below), as announced (Currently Japanese Only) by JPC on 21^st May 2024.

As of March 2024, the amount of investment securities held on JPC’s balance sheet remains at approximately 8.8 billion yen, accounting to around 52% of the total assets and about 61% of the net assets. As shown below, the ratio of Investment Securities over Total Assets has been rising over the past 5 years without improvement.

	3/2019	3/2020	3/2021	3/2022	3/2023	3/2024
Investment Securities over Total Assets	38%	37%	48%	50%	49%	52%
Source: Annual Securities Report for the Year Ended March 2019~2024, Summary of Financial Results for the Year Ended March 2024

In March 2024, JPC announced “Action to implement management that is conscious of cost of capital and stock prices”, aiming to achieve a 10% ROE and to reduce the proportion of cross-shareholdings to less than 20% of the net assets within the next 1 to 2 years. Hibiki recognizes that a large-scale share buyback using funds from the sale of investment securities is essential in order to vigorously promote its announced policy. Therefore, Hibiki Path Value Fund has made two shareholder proposals. The outline of the proposals is below.

① Partial Amendment to Articles of Incorporation (Decision-Making Body for Determination of Surplus Distribution, etc.)

Propose to amend Article 44 of its Articles of Incorporation as it solely designated the authority of the Board of Directors to determine matters concerning the distribution of surplus funds, excluding the authority of the general meeting of shareholders, which inherently possesses such authority.

② Shares Buy-Back

Propose a share buyback of 4.8 billion yen, which is equivalent to the “Valuation difference on available-for-sale securities” on its December 2023 Balance Sheet net equity section, which represents the portion for after-tax unrealized gains on such investment securities.

In the press release issued by JPC on May 21, 2024, the Board of Directors expressed their opposition to our shareholder proposals. As a long-term investor, we have been engaging with them in constructive dialogue regarding the optimization of capital efficiency emphasizing the importance of improved corporate governance standards. We regret that the Board did not accept our latest proposals and we outline our perspective on the Board’s opposing views.

Regarding Board’s opposition to Shareholder proposal ①

JPC is opposed to the Shareholder Proposal ① under the context that “the amendment to the articles of incorporation was not intended to restrict shareholders’ return.” However, as evidenced by the Board’s opposition to our Shareholder Proposal ① and ②, we can conclude that these articles of incorporation can effectively restrict shareholders to submit shareholder proposals deemed as appropriate means of shareholder return.

JPC also cites “the need to implement flexible shareholder distribution strategy by board resolution” as the reason for their opposition. However, as already mentioned in our “Reasons for the Proposal,” even after the Articles of Incorporation are amended as proposed, it is systematically ensured that the Board of Directors can pass resolutions for the distribution of surplus, etc. Therefore, the above reason for opposition outlined by the company cannot be the basis for opposing shareholder proposal ①.

JPC also claims that “if both proposals (Propositions 1 and 2) are approved, the board of directors will have less freedom in making decisions regarding shareholder distribution/payout, making it difficult for the company to flexibly return profits to shareholders.” In fact, the proposals will not “hinder” the board of directors’ freedom to make decisions on shareholder distribution/payout, but rather will solidify the company’s board of directors’ efforts to reduce the proportion of cross-shareholdings to less than 20% of the net assets within the next 1 to 2 years aimed to improve its ROE. We believe that our proposal is in line with the direction which the management has indicated, and also in line with the overall market direction of being “conscious of the share price and the cost of capital.”

Regarding Board’s opposition to Shareholder Proposal ②

JPC is concerned that if Shareholder Proposal ② is approved, it would significantly impair long-term growth and financial soundness given the current situation without sufficient financial resources. However, as mentioned above, the company not only owns approximately 8.8 billion yen in highly liquid investment securities, but also 6.1 billion yen in cash and deposits, and has no interest-bearing debt. We believe that “sufficient resources” have already been secured. If the company does not buy back its own shares on the scale proposed in this proposal when it reduces its strategic shareholdings to less than 20% of net assets in the next one to two years as announced, we are concerned that cash deposits with low returns that are not commensurate with the cost of capital will accumulate further on the balance sheet.

JPC’s Board of Directors also claim that the low liquidity of its shares makes such share buyback “impractical.” However, there are already various methods of share buy-back regardless of liquidity, such as ToSTNeT-3 acquisitions from strategic cross-shareholding counterparties, and with the company indicating its intention to reduce its strategic shareholdings, share buy-back as a means of dissolving crossholdings is a highly realistic and required option. As the company has indicated its intention to reduce its policy cross-shareholdings already, we believe that share buy-back as a means of eliminating crossholdings is an extremely realistic approach.

We kindly ask all shareholders to fairly and carefully assess our shareholder proposals with the viewpoint of what is essential for maximizing JPC’s corporate value.

Please also refer to the link below for the details and rationale of the proposed items by Hibiki.

Details of Shareholder Proposal

24^th May 2024

Note: This post does not constitute a solicitation for an offer to acquire or recommend the purchase or sale of specific securities, or advice on investment, legal, tax, accounting, or any other matters. In the event of any discrepancy or conflict between the English and Japanese versions, unless otherwise noted, the meaning of the Japanese language version shall prevail unless otherwise expressly indicated.

Contacts

Yuya Shimizu

Representative Director and Chief Investment Officer

Hibiki Path Advisors

www.hibiki-path-advisors.com
info@hibiki-path-advisors.com