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Japan rejects UK hedge fund’s bid

“This case is straightforwardly related to national security.” — Nobutaka Machimura, Japanese government spokesman

Japan rejected a proposal from Britain’s The Children’s Investment Fund yesterday, blocking the hedge fund’s efforts to raise its stake in a major electricity company because of potential disruptions to “public order.”

The London-based hedge fund had proposed raising its stake in J-Power — Japan’s largest electricity wholesaler — to as much as 20 percent from its current 9.9 percent.

It was the first rejection of such a proposal under a law that requires government approval before foreign companies can hold stakes of more than 10 percent in companies in sensitive sectors such as utilities, broadcasting and weapons manufacturing.

The standoff with The Children’s Investment Fund is raising questions here about how smoothly Japan has adapted to its self-trumpeted growing needs to open its markets to foreign investment.

Foreign investors have been blocked in high-profile takeover attempts recently, fueling fears that overseas investors will be discouraged when the nation sorely needs new capital to keep growth going.

Ministry officials, speaking on the condition of anonymity customary for bureaucrats here, said an increased stake could allow the fund to control decisions at J-Power, whose full name is Electric Power Development Co.

That could, in turn, hurt Japan’s overall energy policies, including a key nuclear power plant project, they said.

J-Power plans to build the plant in Oma, Aomori Prefecture for operation by 2012. It will run on MOX fuel, a uranium-plutonium mixture that includes recycled plutonium.

If such plans don’t go as scheduled, it could endanger the operation of a plutonium reprocessing plant and hurt Japan’s other nuclear power plants that are counting on the plutonium supply.

In an official reply yesterday, Japan recommended that the fund drop its plan to buy more J-Power shares, a trade ministry official said.

The fund has 10 days to respond. Disobeying the decision would be a crime under Japanese law.

Nobutaka Machimura, the top government spokesman, was quoted by Kyodo News as saying that a rejection of the fund’s bid won’t slow foreign investment into Japan.

“This case is straightforwardly related to national security,” he told reporters, adding that the fund is aiming for short-term profits.

A government advisory panel rejected The Children’s Investment Fund’s proposal to own more of J-Power late on Tuesday.

“The proposal may disrupt the maintenance of public order,” the panel said in a report.

Rahul Moodgal, head of investor relations and business development at The Children’s Investment Fund, said in an e-mail, “We have no comments to make at all.”

Other nations have ways to control stakes in firms considered critical to national security or energy needs. But it is a relatively new issue in Japan and highlights the country’s growing pains as it grapples with establishing checks on foreign investors.

In the past three years, the government approved 763 instances of foreign investors raising their stakes in sensitive sectors, the trade ministry said. But in some areas, foreign investors have run into roadblocks.

Last year, Japan’s Supreme Court rejected an appeal by US investment fund Steel Partners — one of the most visible funds aggressively investing in Japan — to block a sauce-maker’s takeover defense. That supported Bull-Dog Sauce Co’s dilution of Steel Partners’ stake to ward off its tender bid for a larger holding in the company.

Steel Partners has also run into resistance in trying to raise its stake in Japanese beer maker Sapporo Holdings Ltd.

Although mergers and acquisitions have grown in recent decades, many companies still tend to be run by an insular group of managers that seek passive consensus from stakeholders. Critics say Japan has a long ways to go in strengthening shareholder rights.

J-Power was privatized in 2004 under an economic reform program to wrest the world’s second-largest economy out of stagnation.
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