Hibiki Path Advisors (“we”, “us”, “our”) has submitted a shareholder proposal to JAPAN PURE CHEMICAL CO., LTD. (the “Company”), one of our portfolio companies, from our position as the largest shareholder, in order to protect the common interests of the Company’s shareholders.
We have submitted this proposal on the premise that the Board of Directors, which is obligated to manage the company with the aim of maximizing corporate value on behalf of shareholders, has continued to engage in management practices that disregard corporate value and disrespect its common shareholders. As the largest shareholder, we believe this situation cannot be overlooked. As long as the company remains publicly listed, it must face the requests of its general shareholders—including the largest shareholder—with highest sincerity and strive to enhance corporate value, while also bearing responsibility for the outcomes, both positive and negative. If the company wishes to avoid such efforts and instead pursue its own desired direction freely as management, it should also consider the path of delisting, including through an MBO¹, in order to unify ownership and management.
We have been engaged earnestly, with the sole wish that the Company will implement more dynamic measures to maximize its corporate value, as we are greatly attracted to the potential value of this company. Despite our long-standing, friendly, and sincere proposals since 2018, and our position as the largest shareholder holding approximately 18% of the Company’s outstanding shares as of the end of March 2025 (calculated based on 6,067,200 total shares issued, excluding 290,707 treasury shares), the Company has entirely disregarded our requests and abandoned efforts to bridge differences in the company’s direction. Based on this response, we have concluded that submitting this shareholder proposal again this year is necessary to protect and maximize the common interests of all shareholders of the Company.
Our shareholder proposal, aimed at maximizing the common interests of all shareholders, consists of the following three items and four proposals.
① Shareholder proposal (Item 10): Enhancement of stock-based compensation for directors (excluding outside directors)
② Shareholder proposal (Item 11): Partial amendment to the articles of incorporation regarding the decision-making body for dividends of surplus, etc.
③ Shareholder proposal (Items 12 and 13): Strengthening shareholder returns to improve ROE (enhanced share repurchase and dividends)
First, regarding item ① Shareholder proposal (Item 10): enhancement of stock-based compensation for directors (excluding outside directors) — we believe that the primary reason the Company continues to operate in a manner that neglects the common interests of shareholders is that the current compensation structure does not sufficiently incentivize management to focus on increasing corporate value and share price.
To achieve “sufficiently incentivizing management to focus on enhancing corporate value and share price” , it is critical to align the interests and perspectives of management with those of the general shareholders, including the largest shareholder. Without a performance-linked compensation structure where management enjoys meaningful economic gains when the share price rises along with corporate value, and conversely incurs personal financial losses when corporate value deteriorates and the share price falls due to managerial missteps, the Company will remain trapped in a defensive, self-preserving management stance, as is currently the case.
Furthermore, as noted in the “Reason for Proposal – Item 1 (Item 10)” section of the attached shareholder proposal document, the Company’s performance has been sluggish not only in recent years but over the long term (see Figure 1). Despite this, the monetary compensation per director (excluding outside directors) has shown an increasing trend. A compensation scheme that allows monetary rewards to rise while operating profit and capital efficiency remain stagnant is fundamentally misaligned with the interests of shareholders including the largest shareholder, and cannot be overlooked.
Figure 1: Long-term Business Performance and Capital/Asset Efficiency of the Company
Note: The numerator for ROE/ROA is calculated by multiplying operating profit by (1 – tax rate) for each year.
（Source: Created by Hibiki based on Bloomberg, Company Annual Securities Reports, etc.)
Under these circumstances, we strongly hope that the incentive structure will be revised so that internal directors receive stock-based compensation at a level equivalent to their monetary compensation every year. By doing so, we believe they will be better aligned with shareholders’ perspectives and be more personally committed to driving corporate value creation. We also strongly hope that, like shareholders, internal directors will be able to experience and cherish the gains resulting from their effort to increase corporate value. For these reasons, we have chosen to bring forward this proposal.
In response to this proposal, the Company stated in its opposing opinion disclosed on May 20, 2025 that “if, as proposed, the compensation structure for executive directors were to be designed so that performance-linked stock-based compensation—based on metrics such as ROE and TSR—accounts for more than 50% of total compensation, it could result in an excessively performance-weighted structure and create strong incentives to pursue short-term improvements in ROE or TSR through temporary large dividend increases or substantial share buybacks.” However, we believe this view fundamentally misinterprets the nature and intent of the stock-based compensation we are proposing.
To begin with, the company’s stock compensation is subject to transfer restrictions until the director retires from their position. Even if actions such as dividend increases or share buybacks temporarily improve ROE or TSR, if these actions ultimately lead to a decline in the company’s medium- to long-term value, the value of the stock compensation received will also fall. As a result, the total lifetime compensation of the director would be reduced through the decline in share price. Because this downside risk is shared with shareholders who have a medium- to long-term perspective, the directors’ interests are naturally aligned with those of the shareholders. Moreover, if it is indeed the case that the compensation structure is excessively skewed toward performance-based pay and that this creates a strong incentive to focus on short-term ROE or TSR improvement alone, such behavior would constitute a breach of the director’s fiduciary duty of care, and such individuals would be deemed unqualified to serve as directors.
Regarding point ② Shareholder proposal (Item 11): Partial amendment to the articles of incorporation regarding the decision-making body for dividends of surplus, etc. —, we propose a partial amendment to the Articles of Incorporation concerning the decision-making body for dividends and other surplus distributions, as a prerequisite for submitting point ③ (Items 12 and 13), which relates to strengthening shareholder returns. Article 459, Paragraph 1 of the Companies Act stipulates that, in principle, matters such as dividends of surplus should be resolved at the General Meeting of Shareholders. However, under Article 44 of the Company’s Articles of Incorporation, the authority originally vested in the General Meeting of Shareholders for these matters has been transferred to the Board of Directors. Thus, the Board of Directors has the authority to make decisions on the distribution of surplus, etc., without the influence of the General Meeting of Shareholders, which in principle under the Companies Act is supposed to have the authority to make such decisions. We believe that this provision of the Articles of Incorporation could lead to arbitrary decisions on the amount of dividends, etc., without taking into account the status of surplus assets of the Company.
We believe it is important to reaffirm the principle that shareholders are the owners of the company, and that matters which the Companies Act designates as requiring resolution by the general meeting should, as a rule, be decided by the shareholders themselves. In comparison with the proposed amendment, the current Articles of Incorporation appear to have the intent of excluding the authority of the general meeting of shareholders. We find no reasonable justification for such exclusion, and for that reason, we hereby submit this proposal.
The Company stated in its opposing opinion disclosed on May 20, 2025 that “this amendment to the Articles of Incorporation was not intended to restrict shareholder returns.”
However, as evidenced by the Board of Directors’ opposition not only to Shareholder Proposal ② (Item 11) but also to Proposal ③ (Items 12 and 13) which was proposed in order to reasonably achieve the “10% ROE level” that the company has announced without considering extraordinary profits or other special factors, we must point out that this amendment is, in effect, functioning as a mechanism that limits shareholders from proposing the level of shareholder returns they deem appropriate.
Furthermore, even if the Articles of Incorporation are amended as proposed, the Board of Directors will still retain the institutional authority to resolve matters such as the distribution of surplus. Therefore, the ability to carry out timely and flexible shareholder returns will not be hindered.
In fact, a similar shareholder proposal submitted to the Company last fiscal year received support from approximately 40% of shareholders. Assuming that around 15,000 voting rights—held by shareholders presumed to be affiliated with JPC or involved in cross-shareholding relationships, based on the top 30 shareholders listed in the Toyo Keizai Kaisha Shikiho Summer 2024 edition—opposed the proposal and are excluded from the calculation, this would indicate that around 60% of general individual and institutional shareholders supported our proposal. This suggests a high degree of rationality behind our proposal.
Finally, with respect to item ③ (Items 12 and 13) concerning the strengthening of shareholder returns to improve ROE, as stated in our disclosed discussion material with the Company released in February 2023, we believe that the most critical issue hindering the enhancement of the Company’s corporate value is the persistently low return on equity (ROE), caused by the excessive accumulation of cash and deposits and the continued holding of cross-shareholdings.
As of the end of the fiscal year in March 2025, the Company holds approximately 7.6 billion yen in cash and deposits, accounting for about 47.8% of total assets and 55.8% of total net assets. In addition, investment securities amount to approximately 6.0 billion yen, representing about 37.7% of total assets and 43.9% of total net assets. Combined, these surplus assets—amounting to approximately 13.6 billion yen—account for roughly 85.5% of total assets and 99.7% of total net assets, and are, in effect, lying dormant with no direct connection to the Company’s core business operations. Moreover, based on the Company’s past performance, we see no meaningful contribution to earnings from the continued holding of cross-shareholdings. Despite this situation, the Company has continued to delay action. In fact, the medium-term management plan disclosed on April 28 pushed back the reduction target for cross-shareholdings from “within the next one to two years,” as previously stated on March 22, 2024, to “by the fiscal year ending March 2028,” representing a significant step backward.
In the opposing opinion disclosed by the Company on May 20, 2025, two main points are stated:
・That the Company believes that establishing a shareholder return policy based on a comprehensive cash allocation strategy, which takes into account growth investment strategies to strengthen the management foundation, as well as capital efficiency, financial soundness, and the business environment surrounding the Company, will lead to long-term corporate value enhancement and contribute to the joint interests of shareholders.
・That if all of the proposed resolutions were to be approved, it would impair the Company’s financial soundness and flexibility for growth investments, ultimately hindering long-term corporate value creation.
However, given that the simplified ROE², based on operating profit, has averaged less than 4% over the past five years, there is little rationale for maintaining cash and investment securities at a level equivalent to total net assets. Under such circumstances, the above counterarguments appear unconvincing and suggest that the current management’s intent is to preserve excess cash and sustain cross-shareholding relationships for self-preservation purposes.
Furthermore, regarding the above-mentioned concerns about financial soundness, as outlined in “Attachment 2: Simulation of ROE of Shareholder Return and M&A,” which we used during our discussions with the Company’s management in November of last year, even if the capital policy we envision were implemented together with M&A activity amounting to approximately 3 billion yen, the Company would still retain cash equivalent to roughly three years’ worth of net working capital. This means a substantial amount of cash would remain on the balance sheet. Despite this, we have yet to receive any reasonable response or counter-analysis from the Company regarding the contents of our analysis. In light of this, we are deeply disappointed by the management’s unwillingness to seriously consider our sincere proposal, dismissing it entirely based on intuitive concerns about increased risk, which was unsupported by any rational analysis or objective evidence.
Considering the above, we have submitted a proposal to partially amend the Articles of Incorporation. Our objective is to fundamentally improve ROE by promptly reducing or effectively utilizing the Company’s excess cash and investment securities, along with intentionally optimizing the level of net assets. As a first step in setting this direction, we are proposing this amendment as a necessary prerequisite to enable shareholder returns funded by approximately 7.6 billion yen in accumulated cash and deposits (equivalent to approximately 1,313 yen per share), through the partial sale of investment securities.
We believe that, amid the Company’s prolonged underperformance, continuing to implement piecemeal measures while deferring fundamental decisions not only runs counter to the common interests of shareholders but also undermines the Company’s competitive advantage and value creation. Such inaction ultimately harms all stakeholders, including customer transactions, business partners, and employees whose lives are tied to the Company. We respectfully ask our fellow shareholders to support our proposal from the perspective of enhancing and maximizing the common interests of all shareholders, and to exercise your voting rights proactively.
All thing considered, the differences in opinion between us and the Company, we have submitted this shareholder proposal as a means of seeking the trust, support, and judgment of our fellow shareholders. At the same time, this proposal also reflects our strong conviction for the Company’s technological capabilities and its exceptional potential. However, despite this rare potential, we believe that the Company has not succeeded in translating it into growth in revenue or profit. Furthermore, the long-standing failure to sufficiently invest in R&D and human capital—essential drivers of innovation—has prevented breakthrough innovation from materializing. Instead, the Company has fallen into a negative cycle of accumulating cash and investment securities on its balance sheet. As a result, ROE and corporate value have remained stagnant over the long term, yet the responsibility for this continued underperformance has not been adequately addressed. This reflects a deeper governance issue, where complacent management practices persist without being held accountable.
The issue we are raising with the Company is, in fact, not unique to this Company alone. It represents a broader governance challenge shared by many Japanese companies that possess strong technologies and talented employees. This shareholder proposal has been submitted with the intention of shedding light on this fundamental issue. We are firmly committed to doing everything in our power—without wavering—to uphold the integrity of Japan’s capital markets and to protect the fundamental rights of shareholders.
¹ September 9th, 2024, “Request for Consideration of Privatization”
² Simplified calculation to include only profits arising purely from operations, excluding extraordinary gains and losses (calculated by multiplying operating profit by the tax rate for each period)
Attachment 1: Shareholder Proposal
This post does not constitute a solicitation for an offer to acquire or recommend the purchase or sale of specific securities, or advice on investment, legal, tax, accounting, or any other matters. In the event of any discrepancy or conflict between the English and Japanese versions, unless otherwise noted, the meaning of the Japanese language version shall prevail unless otherwise expressly indicated.