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Takeda Pharmaceutical [TYO: 4502] might be able to count on support from its cross shareholders, which account for 30%-40% of its shareholder register, for its proposed acquisition of Shire [LON: SHP] at its EGM, said several fund managers and Takeda shareholders.

“Cross shareholders who do business with Takeda and have supply relationships basically do not vote against the interest of the pharmaceutical company,” said one Tokyo-based fund manager, who is familiar with Japan’s “peculiar” cross shareholding system.

Takeda and Shire announced a merger agreement on 8 May, under which each Shire shareholder will be entitled to receive USD 30.33 in cash and either 0.839 new Takeda shares or 1.678 Takeda ADSs for every Shire share they own. The deal is subject to Takeda shareholder approval of resolutions to approve the issuance of new equity at an EGM.

Cross shareholders are companies that do business with Takeda and hold Takeda shares to maintain their relationships with the pharma company. Currently, about 33.38% of Takeda’s shareholder register is accounted for by domestic financial institutions, 4.22% by domestic brokers, 5.09% by Japanese companies, 29.34% by foreigners and 27.94% by individuals and 0.02% by Takeda.

Almost all of these Japanese financial institutions and companies have traditionally been called silent owners of Takeda shares, in many cases due to the wide-ranging business relationships they have with the pharmaceutical company, according to these companies’ disclosures. A spokesperson at Takeda also agreed with this statement.

A spokesperson at one Japanese regional bank, one of Takeda’s leading shareholders, said: “We hold Takeda shares to strengthen our business relationship with Takeda. This stock holding is not for investment.” Asked whether the bank would act in line with Takeda’s interest at the upcoming EGM, the spokesperson said he cannot make any comments on individual situations.

Nevertheless, there is some evidence that cross shareholders generally do not vote against the interests of the company at general meetings. In 2008, The Children’s Investment Fund (TCI) experienced a defeat in a proxy fight calling on J-Power’s (Electric Power Development) [TYO: 9513] shareholders to raise the energy wholesale company’s dividends.

At the time, John Ho, former head of TCI’s Asia operations, said: “Why [did] Mizuho, Nippon Life and Kajima vote the way they did? Today’s AGM result is distorted by these cross shareholders who do business with J-Power. This policy [of cross shareholdings] is designed to frustrate genuine investors and protect management.” So-called stable (or cross) shareholders accounted for about 34% at J-Power.

At Yushin Precision Equipment’s [TYO: 6482] AGM in 2016, 90% of its shareholders rejected one individual activist shareholder’s proposal to put a JPY 500m (USD 4.5m) cap on executive pay. However, the same proposal submitted by its board at its AGM last year won overwhelming support from shareholders.

“I think Takeda will be able to clear its EGM. Cross shareholders will never act against the company. It is clear if you look at Yushin’s case,” said Mitsutaka Yamaguchi, the individual activist.

Beginning June, last year, under the revision of Japan’s Stewardship Code, asset managers are now urged to reveal how they vote at a shareholding meeting. The disclosure of individual proxy votes will likely result in more institutional investors with relationship with Takeda casting “yes” votes for the Shire acquisition at the meeting, said one Tokyo-based governance lawyer.

“Generally, Japanese financial institutions would not object to any proposals related to business strategies like this acquisition from day one,” said a Tokyo-based fund manager at a major Japanese financial institution. “We can only judge whether it is a good decision after we see results,”

Meanwhile, Takeda may encounter opposition from some individual shareholders at its AGM in June and its subsequent EGM, said the first fund manager. A group of 15 shareholders linked to Takeda’s founding family criticized Takeda’s stagnant performance at its AGM last year, according to the AGM minutes.

The group submitted a proposal to remove Yasuchika Hasegawa from the position of current director and chairman of the board, to take the responsibility of the company’s “not so bright” performance stemming from the acquisition of Nycomed.

The shareholder proposal was nevertheless rejected overwhelmingly by 92% of shareholders at the AGM, overcoming earlier opposition from the group.

Takeda’s bid for Shire is not a particularly good deal for the acquirer, said a fund manager at a UK-based firm that owns both Shire and Takeda stock. The fund manager said he was not in favour of the deal, characterizing it is a combination of poor strategy and financing challenges.

The Takeda spokesperson said the company plans to thoroughly explain to all shareholders, including its founding family, about the rational of the planned Shire acquisition. The spokesperson said the founding family’s shareholding should not be significant, although they do not have any knowledge of their shareholding.

An individual shareholder, who bought Takeda’s shares at JPY 3,755 shortly after the 11 March 2011 earthquake, said she will hold onto the stock because Takeda pledged to keep its per share dividend unchanged at JPY 180.

“I look forward to additional revenue synergies from combined development capabilities,” said the shareholder.

As for the Government Pension Investment Fund (GPIF), Takeda’s largest shareholder with a 7.35% stake, several fund managers hired by GPIF exercise their voting rights “at their discretion”, but they are nevertheless obliged to report to GPIF how they have voted on individual situations, said a GPIF spokesperson.

An analyst said a growing number of institutional investors are expected to use recommendations of proxy advisors, such as ISS (Institutional Shareholder Service), to show the process of their voting decisions has been appropriate.

“The disclosure of voting records will encourage them to vote in line with ISS recommendations so they can prepare explanations when asked by GPIF why they voted the way they did,” said the analyst.

“I view this deal as an accretive transaction. Earnings contributions Takeda can get from the enlarged Takeda will be great despite new share issuance. Also, Takeda gets Shire’s future pipelines,” said an asset manager at Hong Kong-based hedge fund, who owns Takeda shares.

Shire did not comment.