Puzzle & Dragons studio considers shareholder group request for a vote to dismiss its president

The publisher and developer of mobile hit Puzzle & Dragons says it’s considering a shareholder request for an extraordinary general meeting to oust company president and CEO Kazuki Morishita.

Earlier this year, investment advisor Strategic Capital sent a 32-page report to GungHo Online on behalf of its shareholders, entitled ‘Proposal for GungHo Online Entertainment Inc to up its game’.

Strategic Capital has now announced that it has teamed with another group, Intertrust Trustees (Cayman) Ltd, to send a letter to GungHo requesting an extraordinary general meeting of shareholders.

Together, both groups’ shareholders represent around 8% of GungHo shares, and both are now proposing two agenda items for a potential meeting.

The first proposal is for a vote to change GungHo’s provisions. In normal circumstances, voting out a director requires a simple majority of more than 50% of voters, but GungHo has a provision that requires a two-thirds majority instead. The letter wants a vote to be held to remove this provision and revert it back to a simple majority.

Following this, the second proposal is for a vote to dismiss Morishita, something the group will doubtless feel will be easier to accomplish if the first proposal is approved.

The group gives the following five reasons for its proposals (via machine translation):

• “Consistently sluggish performance and stock price over the short, medium and long term.”
• “Morishita is responsible for making GungHo a one-hit wonder.”
• “The market has low expectations of GungHo under Mr Morishita’s management.”
• “Mr Morishita is unfit to be a director and lacks awareness as president and representative director.”
• “Mr Morishita is responsible for the compisition of the board of directors, which resulted in the number of truly independent outside directors (2) being less than one third of the total number of directors (10).”

GungHo has posted a statement confirming it received the request and is now considering it.

“The petitioners believe that, in order to improve the company’s corporate governance and enhance shareholder value, directors should be removable by an ordinary resolution at a shareholders’ meeting,” it summarised.

“Accordingly, they request the removal of Mr. Morishita from his position as director. They have therefore requested the convening of an extraordinary general meeting prior to the upcoming annual general meeting, at which proposals for the election of directors are scheduled to be presented.

“We will carefully review the content of the request and announce our response policy as soon as it will be determined.”

Strategic Capital’s report in January accused GungHo of continuing to rely on the success of Puzzle & Dragons in the 13 years since its release, and failing to build on that with new successful products.

The report estimated that GungHo has spent more than ¥100 billion ($645 million) developing new games other than Puzzle & Dragons, but that those games have earned less than ¥10 billion ($64.5 million).

“Even compared to consoles that have longer development periods, and few trials, 13 years is a long time and cannot be explained away by saying ‘developing games is difficult’,” it argued.

It also claimed that compared to Nintendo, Capcom, Konami, Sony, Bandai Namco and Square Enix, GungHo is the only company with a negative investor return over 10 years, saying that in terms of market capitalisation it’s much smaller than all of them.

“Why do we compare GungHo to game companies that are several magnitudes larger?,” the report asks. “It is because of President Morishita’s remuneration.”

The group argues that company president and CEO Kazuki Morishita’s pay has risen drastically over the past 10 years from ¥120 million ($775,000) to ¥340 million ($2.19 million), despite market capitalisation dropping 78% and operating profit dropping 69% over the same period.

“Comparing President Morishita’s remuneration with the presidents of major game companies, his pay is close to Nintendo, one of the world’s leading game companies,” it argues. “Over the last 10 years the amount has never been less than Capcom or Konami’s.

“By almost any measure GungHo would usually not be in the same league as Nintendo, except for some reason the amount of remuneration for the top management is comparable.”

It adds: “While the president of GungHo and Nintendo make similar salaries, as far as profits are concerned, with less than 1/10th that of Nintendo, we would say that GungHo is not even playing the same game.”