On February 21, 2024, Sun released a press statement directed at shareholders, which we believe is a response to our letters. Management wrote that it is very difficult to distribute the shares of CLBT as a dividend in kind and would not be an appropriate method to increase shareholder value. We disagree.
We believe management has done little to enhance shareholder value, and it is not clear what they have done in the last 2.5 years to close the discount. Furthermore, we believe their press release is an example of their entrancement and un-willingness to really engage with shareholders and to try and resolve this discount which we believe is straightforward.
The following table summarizes Sun's management's reasoning, and our brief reply:
1. and 2. The company wrote the following:
“While many foreign shareholders and Japanese institutional shareholders own SUN's shares, there are still approximately 25% of Japanese individual shareholders who typically do not have an account to hold U.S.-listed securities. As a practical matter, under the current system, such Japanese shareholders would not be able to receive Cellebrite's U.S. listed shares. Since SUN cannot force such shareholders to open an account to hold U.S. listed securities, it is possible that SUN may not be able to distribute its profits to shareholders on a pro rata basis.”
“In the event of a dividend distribution in kind, the dividend is classified as dividend income and is therefore taxable at the SUN's shareholder level. However, they will not receive cash to pay such taxes. In particular, Japanese shareholders who do not have an account to hold U.S. listed securities would have difficulty paying such taxes because they would not be able to receive the Cellebrite shares and then sell those shares to obtain cash.”
Our answer is as follows:
Management could decide to distribute CLBT shares as a dividend in kind. Sun can allocate a minimum of 4 CLBT shares to each Sun shareholder, ensuring the avoidance of fractional shares while retaining approximately 6.5 million CLBT shares. These 4 shares have a value or ¥7,068 as of today (compared to the current share price of ¥3,320). This announcement alone, along with the expected receipt of CLBT shares, is likely to prompt Sun's share price to converge towards fair value. Market participants who are able to receive CLBT shares as dividend will purchase Sun shares with the expectation to receive 4 shares of CLBT until the price disparity between CLBT and Sun diminishes. Shareholders uninterested in receiving CLBT shares can sell them prior to the record day in the market. Any applicable taxes can be settled by selling either CLBT or Sun shares in the market. Additionally, with excess cash on hand, Management could easily distribute an extra cash dividend of at least ¥1,000 per share, providing shareholders with funds to offset some of the potential tax liabilities.
3. The company wrote the following:
“Based on the most recent annual balance sheet as of March 31, 2023, SUN's retained earnings for distribution is only JPY 27 billion, and it does not have sufficient earnings available to implement the distribution of all or a substantial portion of the Cellebrite shares held by SUN as a dividend.”
Our answer is as follows:
Under JP GAAP, management could classify CLBT shares as held-for-trading, enabling Sun to record their fair value in its books. This would allow for the booking of profits, generating distributable earnings adequate for distributing CLBT shares.
4. The company wrote the following:
“Under the Companies Act of Japan, the distribution-in-kind (without giving the option to select cash distribution) to the SUN's shareholders require a special resolution with two-thirds or more votes in favor of such proposal attended at the general meeting which would be difficult to pass given that, generally, Japanese investors would not want U.S. listed shares.”
Our answer is as follows:
Management shouldn't make the decision on behalf of shareholders regarding whether they want to receive CLBT shares, or not. This choice should be left to the shareholders themselves. Additionally, any shareholder who prefers not to receive shares can sell their Sun shares before the record date. Since the beginning of 2024, $540 million of CLBT's shares have been traded - Sun can sell CLBT shares in the market, similar to what IGP did, to meet any cash dividend obligations for shareholders, if it decides to.