Five people who work for NEC said that the Japanese company agreed to sell back a lot of its 51% share to the Japanese company at a price after getting multiple buyout offers from private equity funds around the world for the iPhone supplier, Japan Aviation Electronics Industry.

People involved in the talks who did not want to be named said that at least three global funds made offers to NEC and its public business, JAE, showing they were willing to pay more to buy out the company that makes electronic components.

The fact that these offers existed, which had not been known before, could lead to claims that NEC and JAE, two IT companies, did not act in the best interests of their owners, according to governance experts.

To improve administration and boost returns, the Tokyo Stock Exchange and officials are pushing Japan Inc. to do things like end cross-shareholdings and “parent-child” listings when companies keep their subsidiaries public, which some say is unfair to minority owners.

Thanks to the regulatory push, Japan’s stocks are at their best level in decades, but governance experts say more needs to be done.

If it’s true that there were better deals, Kazunori Suzuki of Waseda Business School said, “This deal will only make JAE management happy.”

Companies that tender their shares don’t have to say if they talked about other offers in situations like this, but Suzuki said NEC could still get in trouble with investors, either in court or at the board level.

JAE makes parts that connect to iPhones. Its market value was 290 billion yen ($1.94 billion) at the beginning of the year, but it dropped sharply when news of its reduced bidding offer spread.

NEC and JAE both refused to say anything.

TENDER OFFER

They told each other on January 29 that NEC would offer to buy back about half of its stake in JAE.

At 2,605 yen, the price was 14% less than what JAE was trading for at its last close. When companies stop cross-shareholdings, they often get discounts like these that let them sell shares without competing with other buyers.

It wasn’t entirely clear when the private equity deals would happen. One of the five people said some were made in the past year or as early as 2022.

Some people, including those who were there and knew what was going on, would only talk if the global funds were not named.

Three people said the best price was around 4,000 yen per share. That is 54% more than the tender offer price and would put JAE’s value at about 369.2 billion yen ($2.5 billion).

Two sources said that at least one of the private equity offers was in writing and included details like price and detailed post-buyout plans. This means that it most likely met the requirements of a “bona fide offer” under the government’s new rules on corporate takeovers that went into effect in August.

The rules say that boards should think about these kinds of deals.

It’s unclear whether the companies’ board of directors discussed the ideas.

FIDUCIARY DUTY

A private equity firm typically makes a “bona fide offer,” according to Travis Lundy of Quiddity Advisors, who writes on Smartkarma, an independent financial research website.

“But the new takeover guidelines are just that—guidelines,” he stated. “Other countries have laws about and penalties against weak execution of fiduciary duty, especially as regards a bona fide offer.”

Since the Jan. 29 announcement of the tender offer, JAE shares have dropped almost 20%, losing nearly $350 million in market value. This was because the move ended plans for a buyout of the company.

A private equity company executive who said the firm was not one of the bidders said, “There was a lot of talk that NEC would eventually sell JAE to get rid of the parent-child dual listing structure.”

Many technology companies, like Hitachi, have been selling off their publicly traded subsidiaries, sometimes to private equity firms.

Suzuki from Waseda said that cases involving a change in company control might need more rules about sharing.

“NEC shareholders missed a chance to obtain profits that could have been generated through a higher bid,” Suzuki said. “While JAE shareholders saw their shares plunge,”

($1 = 150.5000 yen)