SEIBU RAILWAY - DISCLOSURE - TRADITION OF CONDESCENSION
KEYWORD: DISCLOSURE, INSIDER TRADING, CORPORATE LAW, CORPORATE GOVENANCE, COMMERIAL CODE

The rich are different from the rest of us. Its always been said so. This case is either proof its true or that Japan is finally beginning to crack the whip to do what is what government must at a minimum do - make people obey their laws. When the rich feel they are above such mere restrictions, it becomes condescension.

In this case, the Seibu Railways was one of the major railways in Japan. In that sense, just owning the land that railways do, and with astronomical Japanese real estate peaking precisely at where railways have their stations, and most certainly with Japanese banks long preferring real property for loan collateral in Japan, Seibu Railway was most certainly one of Japan’s most wealthy corporations.  Its 40 year  long ignoring Japanese law and stock exchange regulations, could easily be called condescension.

One wonders why it was even necessary. The president and controlling shareholder had long been even included in the Forbes list of the most wealthy people on the planet. He controlled directly or indirectly about 90% of the shares. Following in a tradition Americans of extreme wealth can well understand, he basically controlled ownership of a baseball team, the Seibu Lions.

In the end the company was delisted from the Tokyo Stock Exchange after decades of trading there. The company was also being investigated for securities laws violations and executives may go to jail.

And it was all so unnecessary. None of these problems would ever have happened if the company had never gone public and stayed private. Its troubles arose when it was discovered that the top ten shareholders of  the company held more than 90% of the company. This violated listing requirements for the Tokyo Stock Exchange. Not only did it not disclose this to the stock exchange, it did not make the appropriate disclosure on this matter in its securities filings. Then it made the matter worse by secretly attempting to sell millions of its shares to reduce its holdings and meet the listing standards. That then made it in probable violation of securities laws as the price was declining with its massive sales compared to the small volume of shares floating in the market previously It never disclosed the fact that it had to sell these shares to the purchasers, meaning it had insider information that the purchasers did not know. Almost all of these trades were private placements, off the market. Shares fell by more than half before it was delisted. Companies buying the shares included such major firms as Hitachi, Ltd., Kirin Beverage, Shiseido, several Coca-Cola bottlers, Mitsubishi Electric, Kirin Brewery, Sumitomo, Sumitomo Metal Industries, Sapporo Breweries==some of Japan’s top corporations, which only goes to show the influence of Seibu Railways.

The trouble for the company started this year when the police investigated the company for making secret payoffs to sokaiya, corporate blackmail artists who threaten trouble at shareholders meetings. In view of the overwhelming control of the shares by the controlling group one wonders again why they were worried. Face does appear to be the determinative factor. Probably the same for not staying a private company. Getting listed on the Tokyo Stock Exchange has always added prestige to corporations in Japan.

The controlling groups power was such that it later came out that the company had not had a board of directors meeting in seven years. How many large corporations can say that? Control was overwhelming. Why these troubles? Another problem was that the company’s auditing was done by two individuals, and one of them had been doing it for 29 years. A new law requiring corporations to change accountants every five years, exempts companies audited by one man accounting offices. But for a corporation this large? The Commercial Code from 1993 has required large corporations to have two statutory auditors to monitor legal compliance by the company. One had to be an outside auditor. In Seibu Railway’s case, the outside auditor was a long time attorney who was also a director of Seibu Construction, an affiliated firm.

The managing director of the company was given a suspended 18 month sentence for payment of 187 million yen in profits to a sokaiya, in violation of the Commercial Code. Another 9 former executives were also given suspended sentences on the same problem.

Most of the shares of the company were held by Kokudo Corp., the chairman of which was the above noted fabulously wealthy man.

Izuhakone Railway, another company listed on the Tokyo Stock Exchange and a member of the Seibu Railway group also was under investigation for spreading its shareholdings among executives of the company in order to meet the same listing standards requirements.

Another railway firm, Ohmi Railway, has also admitted to similar practices. Although that company is not a publicly traded firm, it is also a member of the Seibu group.

Individual stockholders did in fact file suit against the company for losses they suffered after the shares began their decline. Ironically, Seibu Railway did agree to buy back the shares it had sold to the above-noted major corporations. One wonders if they got their original purchase price. Knowing Japanese custom, they probably did give back the original purchase price as the business of the company was not particularly hurt.

The Ministry of Land, Infrastructure & Transport also began an investigation to see if the company had been filing false reports. It could be fined up to 1 million yen. Wow! ($10,000)

Of course the company is also being investigated for securities violations such as insider trading.

Copyright 2005. All rights reserved Attorney Roderick H. Seeman

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