Toyota's new class of stock approved despite opposition from foreign funds

Foreign funds were opposed to the shares as they were only readily available in Japan

Toyota Motor Corp shareholders approved a controversial new class of stock on Tuesday that will bring in more long-term investors, but which faced opposition from foreign funds as the shares are only readily available in Japan.

About 75% of shareholders voted in favour of allowing the new shares, which will be unlisted and must be held for five years. After that, shareholders can convert them into common stock or have Toyota buy them back at their issue price.

Toyota has argued its business requires long-term product planning and has designed the plan to lift its ratio of retail investors committed to the company. Individual investors account for 10.5% of its shares, below the 20% average for listed Japanese firms.

"The approval rate is quite high," said Yo Ota, a corporate lawyer at Tokyo-based law firm Nishimura & Asahi. "There are very few types of equity instruments in Japan, so if this move leads to further diversification, that would be welcome."

But the controversy over the scheme is likely to discourage others, analysts said, adding that any company planning a similar move would also need a robust balance sheet. To prevent dilution of common stock, Toyota will buy back the same number of shares.

Japan's biggest automaker required a two-thirds majority for approval and the vote had been seen as close as foreign investors account for about 30% of its shares.

The vote also came as new corporate governance code takes effect in Japan, encouraging investors to voice concerns and forcing companies to consider the views of those who object to management-backed proposals.

Funds like the California State Teachers' Retirement System decried the lack of easy access for foreign investors and proxy adviser Institutional Shareholder Services recommended a 'no' vote, saying it may lead to less incentive for Toyota to maintain fiscal discipline.

But proxy adviser Glass, Lewis & Co spoke in favour of the proposal, saying it would give the automaker more flexibility.

Toyota plans to eventually issue 150 million shares, named "Model AA" after its first passenger car. That would be less than 5% of its shares outstanding.

It argues the shares would give investors more options in a country where the majority of the $14 trillion in financial assets held by individuals are in cash deposits.

Japan's cash deposits currently earn virtually nothing in interest. Model AA shares will have a fixed dividend of 0.5% in the first year, rising by the same increment annually to reach 2.5% in the fifth year.

But they will be priced at a 20% premium to common stock in exchange for the guarantee that they can be resold at the issuance price.

($1 = 123.56 yen)