Oasis Calls for Transparency and Change at Kusuri No Aoki

(Stock Code: 3549 JT)

* Aoki continues to make insufficient and misleading explanations about the Stock Options

* Oasis urges Aoki to answer questions and make disclosures on key issues

* Oasis challenges Aoki’s misleading claims on right to disclose materials

*Oasis urges shareholders to vote AGAINST the re-election and vote FOR the dismissal of the Aoki Brothers and Mr. Yahata to improve Aoki’s governance

More information available at www.KusuriNoAokiCorpGov.com

Oasis Management Company Ltd. (“Oasis”) is the manager to funds that beneficially own approximately 9.7% of drugstore operator KUSURI NO AOKI HOLDINGS CO., LTD. (3549 JT) (“Kusuri No Aoki” or “Aoki” or the “Company”). Oasis has adopted the Japan FSA’s “Principles of Responsible Institutional Investors” (a/k/a the Japan Stewardship Code) and, in line with those principles, Oasis monitors and engages with its investee companies.

As a long-term major shareholder of Aoki, Oasis has been engaging with the Company since 2022. Throughout our engagement, Oasis has raised questions and highlighted issues related to stock options that were issued at a steep discount of over 99% (the “Stock Options”) to President Hironori Aoki and Vice President Takanori Aoki (together, the “Aoki Brothers”).

As a result of our concerns over the Stock Options, Oasis initiated a public campaign (available here) highlighting these issues, and has submitted shareholder proposals for the Company’s upcoming AGM calling for the dismissal of the Aoki Brothers and Aoki Director Mr. Ryoichi Yahata. Additionally, Oasis has initiated a shareholder derivative lawsuit against the Aoki Brothers, Mr. Ryoichi Yahata, and another member of the Aoki Family.

In response to Oasis’s engagement, the Company issued press releases on July 18 and July 26 (the “Press Releases”) in which Aoki continues to seek to justify the Stock Options and continues to claim that the value of the Stock Options was calculated validly by Plutus Consulting (“Plutus”) using a “standard option pricing model”. However, their explanation is woefully inadequate for the following reasons.

1. Failure to provide any answers to the questions and issues raised by Oasis

The Press Releases fail to provide explanations with respect to the issues Oasis has raised in its engagement or campaign materials. As such, we call on Aoki to enhance its disclosure on the points below related to the Stock Options:

The overall valuation:

• Aoki should explain why they consider the valuation methodology used for the Stock Options to be a “standard option pricing model,” despite Oasis clearly explaining, and even citing Plutus itself, that there are no “standard” methodologies for valuing stock options with business-performance-related exercising conditions.
• Aoki should explain whether they still believe the statement they made to the Board -- that “the fair value would be the same if calculated by other appraisers” -- is true. If so, they should provide an explanation as to why their valuation is so different from that calculated by a third-party appraiser retained by Oasis.
• Aoki should explain the details of the discounted value based on each exercising condition to justify the significant discount from JPY 2,642 per share (i.e., the option value without the complex and, in our view, unnecessary and ultimately irrelevant exercising condition) to JPY 15 per share (i.e., the issuance price) despite the lack of material evidence in the Plutus valuation report.

The decision-making process:

• Aoki should explain why they thought it was appropriate to approve the issuance of the Stock Options, which would cause an 11% dilution if executed, in a Board meeting lasting only 75 minutes and apparently without any prior explanation relating to the Stock Options provided to the Board.
• Aoki should explain why the Board did not hold any substantive discussions on the details of the exercising conditions, even though this point is crucial for ensuring alignment of interests between the Aoki Brothers and the Company.
• Aoki should explain why the Board approved the transaction, despite the Board of Directors not receiving any meaningful answers to their questions and concerns.
• Aoki should explain why the Board did not discuss or mention a law firm’s opinions on the appropriateness of the issuance of the Stock Options, despite making statements at the 2023 AGM that the Stock Options were issued based on a law firm’s opinion regarding the appropriateness.

The exercising conditions:

• Aoki should explain why they chose ordinary income excluding the amortization of goodwill as the metric for the exercising conditions, especially considering that goodwill and amortization have increased significantly since then as a result of “buying” ordinary income through aggressive M&A.
• Aoki should explain why the exercising conditions have no connection with the Company’s mid-term plan. The exercising conditions should be a key performance metric for the Company; however, ordinary income is clearly not a key metric, as it has never been used in the mid-term plans.

Estate planning:

• Aoki should explain how the Aoki Brothers were able to secure a loan of over JPY 23 billion in just a few weeks following the downward revision to the Company’s earnings. We believe securing this loan during this time period would likely have been very difficult, if not impossible, if the loan discussion truly took place after the downward revision. This loan enabled the Aoki Brothers to acquire shares owned by their father, Mr. Keisei Aoki, at a depressed price following the downward revision, benefiting both the Aoki Brothers and Mr. Keisei Aoki.
• Aoki should explain why they began discussions with Plutus long before the downward revision (we believe as early as July or August 2019), if the stated reason for issuing Stock Options was to help the Company recover after the downward revision announced in December 2019.
• Aoki should explain why they issued the Stock Options despite the Aoki Brothers acquiring significant shares from their father. This directly contradicts the Company’s stated reason for issuing the Stock Options, which was to incentivize the Aoki Brothers, who were already substantial shareholders.

Auditors and conflicts:

• Aoki should explain the true reasons for changing their accounting auditor. Aoki stated that retaining KPMG would lead to higher audit fees. However, the fees of the Company’s new accounting auditor have increased significantly since the switch and are now more than double those of KPMG.
• Aoki should explain how they managed the conflicts of interest and the extent of the Aoki Brothers’ involvement in the preparation of the Stock Options. The Stock Options were prepared by the Internal Controls Promotion Office, which reports directly to President Hironori Aoki.
• Aoki, or Aoki’s Corporate Auditors, should explain which external valuation vendors were used to assess the request letter from Oasis to initiate a lawsuit against the Aoki Brothers. This should be clarified given that, in response to our claim that “Aoki’s Corporate Auditor’s assessment was highly flawed” due to the fact that the Corporate Auditors did not hire their own third-party appraiser but, instead, asked Plutus to investigate whether the specific issues raised by Oasis in connection with Plutus’ valuation were true or not, Aoki counterclaimed that, “Aoki’s Corporate Auditors utilized assistance from external experts”. In addition, if Aoki’s Corporate Auditors actually hired any impartial third-party appraiser(s) for the purpose of assessing whether the issues Oasis identified regarding Plutus’ valuation report are true or not, they should also clarify why the letter from Aoki’s Corporate Auditors to Oasis references “according to Plutus” without mentioning any other external valuation vendors.

Document disclosure:

Moreover, if Aoki genuinely believes that their process and valuation were fair, they should make the following documents public so that shareholders can review them and make informed decisions for the upcoming AGM based on primary sources of information.

• The full valuation report, including all supporting details provided by Plutus, so shareholders can examine the contents of the report for themselves.
• The minutes of the Board meeting where the issuance of the Stock Options was approved, so that shareholders can assess whether the decision-making process was appropriate.

2. Aoki’s misleading claims about Oasis’s disclosures

In an attempt to divert the discussions away from the true issue -- the Aoki Brothers’ accountability -- Aoki has continued its attack on Oasis, one of its largest shareholders, claiming that the act of Oasis disclosing some of the materials (the “Materials”) that it has obtained from Aoki through a legal procedure “may constitute illegal activity”. As part of such argument, Aoki claims that because the board minutes may contain secret information including trade secrets, it argues that although a shareholder is allowed to inspect and make copies of the board minutes to the extent necessary for its exercise of shareholder’s rights, it is “not allowed to disclose [any such information] to unspecified third parties”. Aoki supports their argument by quoting the Court decision: “As Article 371, Paragraph 3 of the Companies Act allows inspection and copying only to the extent necessary for the exercise of shareholder rights, it is only natural that shareholders owe the duty of good faith that the information obtained through such inspection and copying should not be disclosed to unspecified third parties in an abusive manner.”

This is incorrect and misleading. Aoki distorts the actual intent shown in the Court decision by citing only those parts which could appear, when taken out of the context of the full decision, to support their standpoint, thus attempting to mislead their shareholders and stakeholders. In fact, in response to the request made by Aoki to the Court that “even if the petition is allowed, public disclosure of the board minutes obtained [by Oasis] through inspection and copying shall be prohibited without any exception”, the Court did not accept such argument and, to the contrary, supported Oasis’s position that, “public disclosure to any third party as a part of a “legitimate” exercise of shareholder’s rights can, of course, be possible”. To show the full quote including the part Aoki intentionally hid, the court ruled as follow:

• “As Article 371, Paragraph 3 of the Companies Act allows inspection and copying only to the extent necessary for the exercise of shareholder rights, it is only natural that shareholders owe the duty of good faith that the information obtained through such inspection and copying should not be disclosed to unspecified third parties in an abusive manner. Hence, it could not be said that the public disclosure of the valuation report to any third party should be prohibited without any exception.” (emphasis by Oasis)

In addition, in support of Aoki’s claim, Aoki also alleged regarding last year’s public campaign conducted by Oasis that “[Aoki] explained that all issues raised by [Oasis] were wrong. However, [Oasis] ignored such explanation and continued public disclosure of [the public campaign materials] and disseminating wrong information to investors”.

However, in actuality, the Court clearly held that, “given the content of [the public campaign materials], it cannot be denied that [Oasis] publicly disclosed [the public campaign materials] with the aim of bringing attention to [Aoki’s] governance issue and explain the background of their shareholder’s proposal conducted for the purpose of enhancing Aoki’s corporate value”, and as a result, the Court issued the order cited above.

Therefore, the key point of the Court decision cited by Aoki is that the Court clearly supported the position that public disclosure of the Board minutes obtained through inspection is legal as long as such disclosure is conducted to the extent necessary for exercising shareholder’s rights and is not conducted in an “abusive” manner.

Aoki intentionally ignored this point, selected only those portions of the court decision that could seem, in isolation, to support Aoki’s view, and circulated its unreasonable interpretation taking full advantage of the fact that many other stakeholders cannot directly read the court decision for themselves. Oasis has fully complied with the Court’s order, only quoting parts of the Board minutes and then only to the extent necessary to make its point for improving the Company’s corporate governance and enhancing its corporate value, which would fall within the “legitimate” exercise of shareholder’s rights.

To be clear, Oasis has not disclosed any trade secrets whatsoever, but disclosed only the limited portions of the minutes sufficient to disclose the short duration of the relevant Board meetings and the limited details of the discussion of the Stock Options by the Board. Aoki’s attempted criticisms of Oasis’s actions in this regard are baseless, reckless, and misleading. Oasis is confident that its use of the Materials falls within the “legitimate” exercise of our shareholder’s rights as recognized by the court. Oasis would like to point out that Aoki’s act itself to intentionally emphasize the “possibility” of Oasis’s acts being illegal and attacking Oasis without sharing the full context may constitute illegal activity.

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Oasis reiterates its recommendations to fellow Aoki shareholders to vote AGAINST the re-election and vote FOR the dismissal of President Hironori Aoki, Vice President Takanori Aoki, and Mr. Ryoichi Yahata. Oasis also demands that the Aoki Brothers not exercise the Stock Options until a judicial decision is rendered by the Court as Oasis pursues a shareholder derivative lawsuit against the Aoki Brothers to protect the Company and its shareholders.

For more information, please visit www.KusuriNoAokiCorpGov.com. We welcome all stakeholders to contact Oasis at info@KusuriNoAokiCorpGov.com to help improve Kusuri No Aoki’s corporate governance.

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Oasis Management Company Ltd. manages private investment funds focused on opportunities in a wide array of asset classes across countries and sectors. Oasis was founded in 2002 by Seth H. Fischer, who leads the firm as its Chief Investment Officer. More information about Oasis is available at https://oasiscm.com. Oasis has adopted the Japan FSA’s “Principles for Responsible Institutional Investors” (a/k/a the Japan Stewardship Code) and, in line with those principles, Oasis monitors and engages with our investee companies.

The information and opinions contained in this press release (referred to as the "Document") are provided by Oasis Management Company (“Oasis”) for informational or reference purposes only. The Document is not intended to solicit or seek shareholders to, jointly with Oasis, acquire or transfer, or exercise any voting rights or other shareholder’s rights with respect to any shares or other securities of a specific company which are subject to the disclosure requirements under the large shareholding disclosure rules under the Financial Instrument and Exchange Act. Shareholders that have an agreement to jointly exercise their voting rights are regarded as Joint Holders under the Japanese large shareholding disclosure rules and they must file notification of their aggregate shareholding with the relevant Japanese authority for public disclosure under the Financial Instruments and Exchange Act. Except in the event that Oasis expressly enters into the agreement as a joint holder requiring such disclosure, Oasis does not intend to take any action triggering reporting obligations as a Joint Holder. The Document exclusively represents the opinions, interpretations, and estimates of Oasis.

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