Japan's ADK faces lawsuit following Bain tender offer

WPP, which holds a 25% stake in ADK, has accused the Japanese company of breaching their contract by entering a hedging agreement with Morgan Stanley regarding the shares it holds in WPP, according to a statement by ADK. The UK-headquartered company said the agreement prohibits any transfer or disposal of WPP shares by ADK.

ADK undertook the hedging agreement in preparation to sell its 2.4% stake in WPP, which it had already announced it would do as part of the Bain deal. It has also requested WPP to sell its shares in ADK to Bain at the PE firm’s offering price of JPY3,660 per share; per their agreement WPP must either sell to Bain within 180 days following the request at a price designated by ADK, or sell the shares on the open market within a year.

WPP is seeking an injunction against ADK in Tokyo District Court and has also filed for arbitration seeking to have ADK’s share sale request ruled invalid. In its statement ADK said it did not consider the Morgan Stanley agreement to violate the agreement and that it had followed proper procedures for ending the relationship.

WPP has vocally criticized the Bain offer since it was announced last month. Following the endorsement of the proposal by ADK’s management, WPP said that ADK had failed to take advantage of numerous opportunities for improvement or to respond to WPP’s suggestions regarding expansion of digital operations and restructuring of its money-losing overseas operations.

In addition, WPP questioned whether good-faith attempts had been made to secure a better offer for the business, saying it was aware of at least one other serious proposal that ADK’s management refused to consider. WPP said it and several other significant shareholders were concerned that Bain’s promises in regard to continuity of management had led to the acceptance of a bid that significantly undervalued the company.

ADK is Japan’s third-largest advertising agency by market share, with clients across multiple sectors. According to its most recent annual report, the company recorded revenue of JPY353 billion for the year ended December 2016, up from JPY352 billion in 2015. Over the same period, net profit fell from JPY5.6 billion to JPY2.6 billion.

Following the acquisition, Bain plans to delist ADK. The company is looking to make significant changes to its business model and sees privatization as the best way to provide needed financial and strategic flexibility.

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