Toshiba shareholders are not happy with the three-way breakup plan announced by the company, partly due to lack of confidence in the current board and management’s ability to implement the plan.

A long-term shareholder in Toshiba has said that it is disappointed with the board because there was no price solicitation for the entire company despite repeated assurances from the board, specific requests from investors, and interest from private equity firms like KKR and Bain. “In their disclosure and subsequent investor Q&A, they confirmed that they never requested the private equity firms to indicate a price nor did they create any competitive dynamic. Why did they not do such a simple thing unless the strategic review precluded from day one the possibility of a privatization?” the shareholder, who declined to be named, told Activist Insight Online. This “raises a deep question as to how independent the board actually was in the process,” the investor added.

Another smaller investor that has exited the stock confirmed that discontent against the breakup plan is running high, especially in the camp of activist investors. Collectively, the activist investors, which include Effissimo Capital Management, Farallon Capital, 3D Investment Partners, Oasis Management, and King Street Capital, own around 29% of the shares. Elliott Management reportedly owns another stake that is below 5%.

Effissimo, Toshiba’s largest shareholder with 10% of the shares, was reportedly against the breakup initially, but then publicly said it is still assessing the plan.

In a letter to the board on November 24, 3D Investment Partners also objected to the plan. “Rather than examining the full range of possibilities and reporting on those possibilities to shareholders, the [strategic review committee] has instead decided that the status quo, with some minor shuffling of businesses into different corporate entities, is the prescription for success, despite years of evidence to the contrary,” 3D said.

“Toshiba does not comment on individual exchanges with shareholders,” a spokesperson for Toshiba said in an emailed statement to Activist Insight Online. “Based on the plan that Toshiba has announced on Nov. 12th, Toshiba will continue our effort to work closely with our shareholders to explain our plan and benefits.”

Worst solution

On November 12, after surviving a proxy fight with Effissimo that nonetheless caused major turnover in its management and board ranks after collusion with the government was exposed, Toshiba announced that it would split the company in three. One firm will focus on infrastructure services, another on electronic devices and storage solutions, and the third will be a holding company for shares in memory chips company Kioxia and office machinery manufacturer Toshiba Tec.

In addition to a three-way split, other solutions that were considered by Toshiba included an outright sale and a significant minority investment. According to the shareholder, both these paths would have been better than the breakup because “the root cause of the conglomerate discount is the company’s poor corporate governance and either option would have brought in a party with skin-in-the-game to oversee management.”

A source familiar with the situation has told Activist Insight Online that private equity firm KKR, which was rumored to be interested in making a bid along with other buyout shops, proposed a price high enough that would have satisfied activist investors on the share register. Oasis publicly indicated that a private equity bid should value Toshiba at around 6,200 yen per share ($53.7). Toshiba stock closed at 4,745 yen per share ($41) Wednesday.

Low confidence

A breakup is not necessarily a bad strategy, according to the current shareholder, but it requires trust in the current board and management to pursue it for value maximization. “That trust has waned given the deficiencies in the strategic review process,” the investor said.

One of the biggest criticisms about the plan is that it lacks details about the potential management and corporate governance frameworks of the three separate companies.

Given the level of discontent, a proxy contest to change the composition of the board is likely, but investors would have to tread carefully given that the government is watching the situation closely.

However, frustration inside the government may be brewing as well. Two separate sources have told Activist Insight Online that the government was surprised at the breakup plan. Another source has told Activist Insight Online that there is consensus in the government that a private equity buyout is the best path forward.

If history is any guide, Toshiba’s board and management will not capitulate easily.