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BOOK SERIES | Minority Shareholders, Chapter 21: The Price of Sentimental Value

After winning in court, Auntie Sumida is surprised by mixed threads of regret about her choices in Chapter 21 of Shin Ushijima's novel, Minority Shareholders.



In this chapter of Minority Shareholders, I continue the story of Norio Takano. He is not a specific person; he is a character created for my book out of some high rollers who had existed during the bubble period.

As a young lawyer, I witnessed the generation of enormous wealth from scratch. A minority shareholder of a family company brought an action to the court and succeeded in taking hundreds and thousands of yen. I saw it firsthand. Ten years after the bubble popped, I started work related to corporate governance. In this book, my fictional characters tell the story of problems that persist in joint-stock corporations. What is an organization called a company? What if Norio Takano were reborn in this era?

This story is a work of fiction. Any resemblance to actual characters or organizations is entirely coincidental and unintentional. ー Shin Ushijima

Read earlier chapters of the series.

Minority Shareholders
Book cover, "Minority Shareholders" by Shin Ushijima.

CHAPTER 21: The Price of Sentimental Value

Continuing from Chapter 20: Takano and Ooki are continuing their intense conversation about taking on new minority shareholder cases. "So this time, please help me with another epoch-making project." says Takano, placing both hands on the table and politely lowering his head ー in slow motion.

"Look, Takano. This time I cannot make that decision on my own. The firm has grown bigger and has its own will as an establishment. It's the same as a business corporation. I'll talk to the partners. I think I can persuade them, but it's not me that makes the final decision," Ooki said in a contained but confident voice.

Auntie Sumida's case was easily solved by the court. The price was determined at ¥250 million. 

In charge of the trial was Miwako Tsujita, a partner. She had asked a certified public accountant with whom she was acquainted to provide an opinion on the value of the company, based on which she produced an appraisal report to be submitted to the court. It worked wonders to persuade the court.

Getting to the Company's Value

Tsujita had given a creditable account of the story behind the case. 

It was explained in detail that although the company name, Sumida Iron Works, gave the impression of being a small iron-making factory, it was years since it had closed down its initial business. And it currently operated with only five or six employees who were in charge of handling the company's real estate leases for some of the property it owned. 

"The block shareholders of Sumida Iron Works chose themselves as board members. And [they] not only keep the profits to themselves as remuneration for being board members, but also enjoy golfing and wining and dining with such remuneration. Their attitude of mixing public and private is intolerable," explained the report. 

In the report, Tsujita presented concrete figures to condemn their misconduct. Among all, Mr  Souhei Kawano, as soon as he obtained a two-third stake, had turned on Sumiyo Kawano and started giving her a raw deal even though she was his aunt-in-law and a former board member. 

But Tsujita deliberately addressed this part detachedly, objectively, and accurately in the report. Regarding the amount of money, which was of the utmost importance, she demanded that the company's future earnings under DCF analysis and the value of its net assets be employed at an equal rate, 50 to 50, in calculating the valuation. And she concluded as a result that the total shares of Sumida Iron Works were worth ¥5.37 billion. 

From Book Value to Fair Price

Although the book value was only ¥1.5 billion, the fair price when calculated for submission to the court added up to more than three times the book value. This result implied that the property of the company had a gigantic amount of unrealized gains. Seven percent of ¥5.37 billion was equal to ¥375.9 million. 

But Tsujita decided to decrease the price to two-thirds because her client's shares were a minority stake which did not control the management. Therefore, the report concluded that the court should decide on ¥250 million.

At trial, all figures are determined by the court. But the appraisal report that each party produces carries significant weight. 

As Tsujita did, the other party, Souhei Kawano, also submitted an appraisal report in the name of Kyoujima Property, whose president was Mr Isao Kino. The court appointed an appraiser. To the court, the seller and the purchaser mean nothing short of parties in interest. The court tries to ensure a level playing field for both parties as always. 

As for the seller in this case, with only a 7% stake, it was impossible to acquire control of the company, let alone become the owner. Furthermore, it was not feasible for her to become a board member and receive remuneration. Therefore, her shares held no more value than the value of the dividends she received. 

But the purchaser saw a totally different picture. The number of shares by which he took control of the company would increase. The purchaser, as a shareholder having a majority stake, determined the amount of dividends at his discretion. This is a tricky aspect on the part of a joint-stock corporation where things are determined by majority shareholders.

Fair, Faithful, and Sincere

As opposed to private trade negotiations among the people, here the price is to be determined under the intervention and authority of the court, thereby removing nasty power imbalances between the seller and purchaser. Therefore, in general, the court makes its decision taking into consideration the position and situation of each party on a fair basis. Eventually, the court tends to make its decision based on a fifty-fifty valuation of both parties.

But that is only on the surface.

A judge works all alone. He thinks by himself, judges by himself, and can make decisions at his own discretion. We should keep this in mind: the judge is also nothing more than a normal, ordinary person. Therefore, he is subtly and sensitively affected by the way people concerned behave at trial. 

That was the reason why Tsujita bent over backward to explain to the judge what brought the case to trial. Difficult as it may sound, it is the judge's free conviction. In a nutshell, he can make whatever decision at will.

At trial, what matters most for people concerned is that they be fair, faithful, and sincere. 

In this respect, Souhei Kawano obviously gave a bad impression to the court because he had used Isao Kino, a friend from his university preparatory school, as a dummy to set up Kyoujima Property and make the company a transferee. It triggered the court's anger. The court would never tolerate whatever tricks they tried to play.

Greed Doesn't Get the Judge

The court strongly denounced Kawano for having kept the dividends low. For such a company, which had done its business in an arbitrary manner, the court could not value its shares based only on the amount of dividends distributed. Instead, the court announced that it would extensively count the net assets of the company in its valuation. 

There was a remarkable disparity between the book value and the market value because the land purchased by the company long ago had drastically increased in price. The court decided to employ the market value instead of the book value to estimate the share price because of the sizeable difference between the two. 

Above all, the court said in no uncertain terms that since the company was an ongoing business it would not disregard or deduct corporation income tax that would be imposed at the time of dissolution of the company. 

Mr Yuzuru Ohida, a lawyer hired by Souhei Kawano, said to the court, "It is actually Mr Kino who will buy the shares as an individual though he uses the name of the company. 

"He is completely an independent third party. It is different from the case where Kawano buys the shares. Therefore, the share price should be determined in consideration of simple yield rate, namely, the value of expected future dividends. As the dividends should continue to be distributed, a certain discount should be applied, say, 30% or so."

Tsujita came forward to refute the opponent's claim as a matter of course.

But the judge answered with a straight face. "That's enough. I would like to make a decision soon."

Mr Ohida, who may have misinterpreted the judge, grinned wickedly.

Sumiyo's Sense of Loss

A week later, Tsujita got a phone call from one of the associates at her firm who had gone to the courthouse. He reported the court's decision to her. Immediately after that, she reached Sumiyo Kawano on her cell phone and said in an excited voice, "Kawano-san, we made it. The court agreed on ¥250 million."

"Ah, Sensei, so all my shares will be gone…none of them will be left in my possession? They were the shares of the company my husband founded. I've sold them all. It feels like any trace of my life in this world has gone with it," she said.

It was such a disheartening response. But Tsujita took it in stride. She held her tongue, thinking that Sumiyo Kawano may well think that way, for she has lived for eighty-eight years.

After a few moments of silence, Sumiyo Kawano said in a quiet voice, "I'm sorry, Sensei. I know I must say, 'Thank you.' Of course, I'm grateful for the result, but I've suddenly realized in disappointment that my life revolves around money after all. Anyway, please deduct the taxes, lawyers' fees, and Norio-san's money from this ¥250 million. I know I'm in no position to receive even one yen, but thanks to this money, I think I'll be able to sustain my life until I leave for the next life."

Tsujita responded to comfort her. "You have a lot of things that you can do before you depart for the next life."

Sentimental Second-Guessing

"Eh?" Sumiyo uttered the word as a question, then continued. "I wonder what Matao Kawano, my husband, makes of this situation in the next life. He was tough on others. If I see him in the next life, he may say to me scornfully, 'This proves that you're nothing short of a stupid hag.' But no matter what he says, it can't be helped. It's true after all."

Tsujita had an odd feeling. {When people cash in what they have cherished, do they feel they have ceased to exist even if they receive money in return? If we have money, we can help others. That makes us feel confident that we do exist in this world.} 

Sumiyo Kawano had definitely hoped to change her shares into money. In fact, it was Sumiyo Kawano herself who had persistently urged Tsujita to cash in her shares, as though she were being chased by a devil from hell. Tsujita felt unrewarded. 

The money originally deposited by the purchaser into the bank account of Ooki's law firm was reduced to ¥196 million after deducting 20% in lawyer's fees and consumption tax. Then, all the other payments including 20% in separate income tax and the ¥5 million Takano had paid were deducted. And the remainder of ¥141 million was sent to Sumiyo Kawano's bank account. 

When the Phone Rings

After paying the money to Sumiyo Kawano, Ooki and Tsujita and all the other lawyers concerned will never have a chance to see Sumiyo Kawano again. Such is the relationship between the lawyer and the client. 

They meet each other because they need to. And they talk friendly with each other because they need to. Depending on the situation, they might meet every single day. But once their relationship has ended, they leave each other's sight. 

They cease to meet, but when trouble occurs, a phone rings.

Continues in: Minority Shareholders, Chapter 22: New Target Mukoujima Transport


Minority Shareholders is a work of fiction and any similarity to real characters, companies and cases is purely coincidental and unintentional. Sign up to join our mailing list and look for the next chapter every Saturday on JAPAN Forward.

Author: Shin Ushijima

The founding partner of Ushijima & Partners, lawyer Shin Ushijima has an enormous wealth of experience in international transactions, mergers, and acquisitions, dispute resolution, system development, anti-monopoly law, labor, and tax law. Concurrently, he heads an NPO called the "Japan Corporate Governance Network." And in his leisure moments, he writes fiction. Additional details on Shin Ushijima's career, awards, publications, and more are available at his website: Ushijima & Partners, Attorneys-at-Law.