An independent Tokyo Radiator

Dear fellow shareholders, investors and other market participants,

Asset Value Investors (“AVI”) today announced that it has submitted shareholder proposals to Tokyo Radiator Mfg. Co. Ltd. (TYO 7235, “Tokyo Radiator”), a subsidiary of Marelli Corporation (“Marelli”), to address conflicts of interest between the parent company and minority shareholders arising from Tokyo Radiator’s listed subsidiary structure.

For almost five years, AVI has been in communication with Tokyo Radiator; Marelli, which holds approximately 40.1% of Tokyo Radiator’s shares; and Marelli’s parent company KKR, to resolve governance issues caused by Tokyo Radiator’s listed subsidiary structure and enhance Tokyo Radiator’s corporate value. AVI submitted shareholder proposals in June 2021 as part of its engagement activities, but, since then, Tokyo Radiator has continued to ignore AVI’s proposals and has made little effort to improve its weak governance.

In particular, AVI called on Tokyo Radiator to abolish the cash deposit system with Marelli, where approximately JPY 4.1 billion of cash, equivalent to 47% of Tokyo Radiator’s market capitalisation of JPY 8.8 billion, was lent to Marelli. As pointed out in ‘Practical Guidelines for Group Governance Systems’ by the Ministry of Economy, Trade and Industry, the deposit system is a cheap source of funds for Marelli. The system benefits only Marelli at the expense of minority shareholders who suffer from a return on the cash investment far below Tokyo Radiator’s cost of capital. Such conflict, in turn, leads to a low valuation (price-to-book ratio of 0.4x).

While Marelli recorded losses for the past four fiscal years, Tokyo Radiator continued to deposit cash to Marelli until shortly before Marelli entered into a debt restructuring on 1 March 2022, despite the risk that the deposits would not be returned in the event of Marelli’s bankruptcy. The continued depositing of cash with such a poor-quality counterparty was a potential breach of Tokyo Radiator’s Board’s duty of care. AVI supports the return of the deposits to Tokyo Radiator, but has nonetheless submitted shareholder proposals to ensure that such a practice is not reinstated again and that the deposits are returned to shareholders on an equal basis.

Other shareholder proposals call for the transition to a company with an audit and supervisory committee; the establishment of a nomination committee and a compensation committee chaired by independent outside directors; and the abolishment of senior advisory positions (Komon and Soudanyaku) to enhance the governance. In addition, AVI proposes introducing a stock-based compensation scheme for directors, which would provide greater incentives to increase corporate value and align interests with shareholders.

AVI asks its fellow minority shareholders to express their disapproval of the board of directors’ disregard for minority interests, by voting in favour of the shareholder proposals.

23rd May 2022

Joe Bauernfreund
CEO & CIO, Asset Value Investors