OTSUKA KAGU LIMITED
Tokyo Stock Exchange: 8186              Meeting Date: 3/27/2015

“I made a bad child.”

So says Katsuhisa Ohtsuka, the founder and chairman of Otsuka Kagu Ltd., amidst a founding family quarrel that has snowballed into a rare occurrence in Japan – a contested proxy meeting.

The quote refers to Mr. Ohtsuka’s own daughter, Kumiko, who served as president of the Company since March 2009 but was dismissed by her father in June 2014.  At the time that Kumiko was appointed president in 2009, the Company was struggling with the aftermath of an insider trading scandal in 2007 as well as the global financial downturn shortly thereafter. To revitalize the Company and address its declining performance, iMs. Ohtsuka has recently proposed shifting the furniture store away from its original business model of a membership system — which required customers to submit their names and addresses at the entrance of the store and whereby an individual agent would thereafter be appointed to assist in the sale — to a more casual business style and store experience.

Unfortunately, Katsuhisa Ohtsuka was unaccepting of these proposed changes and refused to witness his business model phased out. As such, in July 2014, the founding father made “a difficult decision” and dismissed his daughter as president and appointed himself as chairman and president of the Company. Since the dismissal, a public battle has played out between father and daughter, disagreeing over who is to blame for the declining performance, leadership styles, and the corporate governance of the Company.

Not surprisingly, the father became somewhat autocratic after consolidating power to himself. According to the current board, he did not listen to the board’s requests to provide an explanation regarding his business plan, which purportedly contained excessive advertising expenditures. The board of directors convened a meeting in January 2015 and a majority of the members, including all external members, resolved to re-appoint Ms. Kumiko Ohtsuka as president and not to re-nominate Katsuhisa Ohtsuka in the new board slate proposed for the upcoming shareholder meeting. Then, in turn, Katsuhisa Ohtsuka, who is also the Company’s largest shareholder with an 18.88% interest, submitted a set of shareholder proposals to entirely replace the management’s nominees of board of directors and statutory auditors at the shareholder meeting.

This proxy battle has split the Ohtsuka family in two. According to news reports, Katsuhisa Ohtsuka is supported by his wife, who is also a major shareholder of the Company, and his eldest son. On the other hand, Kumiko Ohtsuka is supported by her younger siblings, including Ms. Maiko Ohtsuka, who serves as the representative of the family’s investment vehicle, which holds a 10.21% stake in the Company.

How this annual meeting will play out will certainly be interesting to observe. The dissident (the father) claims that 80% of the Company’s executives and all of the Company’s 16 store managers are supportive of the autocratic founder and his proposed slate. On the other hand, the board of directors has stated that it has the support for the management-proposed board and its strategic initiatives from institutional investors, including Brandes Investment Partners, as well as the proxy advisory firms.

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