JAL IPO: Excess Overseas Investors Equals Fewer Overseas Investors?

Japan Airlines Co., Ltd. (“JAL”) relisted on the Tokyo Stock Exchange (the “TSE”) on September 19, 2012 after emerging from one of the biggest bankruptcies in Japan in January of 2010. JAL’s $8.5 billion IPO was one of the largest initial offerings this year, second only to Facebook Inc’s $16 billion IPO in May. The relisting of JAL was highly publicized and was closely monitored on both a domestic and international basis, particularly after the disastrous consequences of the over-hyped Facebook’s public offering. It appears that concerns of this nature may be warranted – on September 26, one week following JAL’s relisting, its share price slumped to ¥3,225 from the initial IPO share price of ¥3,790.

In addition to concerns regarding JAL’s stock price, the Company may face issues regarding its ownership structure. At the time of its IPO, it was estimated that a quarter of JAL’s ownership had been made up of foreign investors; however, it is now clear that 39.5% of its shares are held by overseas investors. This may present significant problems, as no more than one-third of Japanese airlines, by law, cannot be owned by companies or residents located outside of Japan. Further, according to Nikkei, JAL’s articles of incorporation stipulate that at least two-thirds of its voting rights must be held by domestic shareholders, meaning that JAL may refuse to record overseas investors on its shareholder registry, which would effectively exclude them from receiving dividends and exercising their voting rights.

It is widely acknowledged that higher ratio of foreign investment correlates to higher governance standards, which is also positively associated with higher ROE. If overseas investors are completely cut out from receiving dividends or exercising their voting rights, it may trigger a flight of foreign investment at a time when not only JAL, but Japanese economy, needs a boost. As JAL’s share price has decreased, if overseas investors are left with no other option than to sell their shares, it will have a further deflating effect. Given these significant potential issues, it is likely that many will be closely watching JAL’s future performance and ownership structure.

Another thing shareholders should be mindful of: Kazuo Inamori, a highly respected leader in the corporate world, who successfully turned around JAL in a little over two and half years, has publicly made known his intention to resign sometime next year.