JXHLY ENEOS Holdings Inc (PK)

TOKYO—Saudi Arabia and Iran's battle for hegemony in the Middle East threatens to upend a $4 billion merger in faraway Japan.

The family of the late founder of Idemitsu Kosan Co. is opposing a planned merger between the refiner—Japan's second-largest behind JX Holdings Inc.—and Showa Shell Sekiyu K.K., its smaller rival. Idemitsu has maintained close ties with Iran since the 1950s while Showa Shell is 15% owned by Saudi Arabia's state-owned Saudi Arabian Oil Co., known as Aramco.

The Idemitsu family's law firm said a merger would be "inappropriate" given the growing tensions between the two countries. The two Persian Gulf nations, which belong to rival sects of Islam, are jockeying for political influence in the region and have recently clashed with each other over the question of a cap on crude output.

The family also cited differences in corporate culture, such as the presence of a labor union at Showa Shell. Idemitsu prides itself on what it describes as a family-based culture that has no labor union.

Mr. Idemitsu's family together controls a 33.9% stake and could block the merger, planned for April, by preventing a two-thirds approval in a vote, said its legal representative, the Daiichi-Chuo Law Office. The company, however, said it believes the founding family's voting rights are 21.2% and exclude the 12.75% stake owned by two public foundations that bear the Idemitsu name.

The company's colorful founder, Sazo Idemitsu, died in 1981.

Called a "pirate" for delivering cheap fuel directly to fishing boats at sea, he was arguably one of the most nationalistic of Japan's industrialists. He repeatedly took positions against what he called the "international oil cartel" that included both Saudi Arabia and the Anglo-Dutch Royal Dutch Shell, which owns 35% of Showa Shell.

In 1953, Mr. Idemitsu defied Britain by buying oil directly from Iran, and the company has continued to procure Iranian oil, although at much smaller volumes in the wake of U.S. sanctions.

"Idemitsu Kosan has a tradition and commitment of serving the nation and society, while Showa Shell is half-owned by foreign corporations," the Idemitsu family said. "A merger would force many large changes," it said, adding that a thorough review of costs was necessary, as was an overhaul of the firm's business structure.

After the family's statement was released, Idemitsu's share price tumbled 6.5% and Showa Shell fell 2.8% on Wednesday, while the benchmark Nikkei Stock Average rose 1.6%.

Japan has been pushing refiners to consolidate to fight a shrinking market. If the merger were derailed, it would mean less scale for both companies to compete against an impending merger of JX Holdings and TonenGeneral Sekiyu, which will control more than half of the domestic market together. Idemitsu and Showa Shell together control about 30% of Japan's refining market.

"The merger will not erode Idemitsu's strengths," a shareholder quoted Idemitsu CEO Takashi Tsukioka as saying, after a legal adviser to the Idemitsu family voiced opposition to the merger at a shareholder meeting on Tuesday. Officials similarly assured analysts in a telephone conference that the company is committed to the merger.

If efforts to persuade Mr. Idemitsu's eldest son and the firm's honorary chairman Shosuke Idemitsu and the rest of the clan fail, the company has a number of options to push forward the merger with Showa Shell. One would be to issue shares to dilute the family's clout. Another would be a tender offer for Showa Shell shares, following the current plan to buy a 33% stake from Royal Dutch Shell. A company spokesman declined to comment on whether the company would consider such options.

The public manner in which Mr. Idemitsu's family voiced its opposition is also a sign of how much the once-unquestioned influence of corporate founders' descendants is fraying in Japan.

Japan Prime Minister Shinzo Abe has stressed corporate governance as a focus of reform, following an accounting scandal at electronics conglomerate Toshiba Corp. and a massive air-bag recall at Takata Corp. To comply with stricter guidelines, 78% of firms listed on the first section of Tokyo Stock Exchange have at least two independent outside directors on their boards, compared with less than half the year before and just over 20% in 2014. Companies are also hurrying to step up roadshows abroad to woo more foreign investors.

In a sign of the strengthening voice of shareholders, Toshifumi Suzuki, chairman and chief executive of Seven & I Holdings Co., resigned after losing a boardroom clash over Mr. Suzuki's successor against Daniel Loeb, head of U.S. hedge fund Third Point LLC, in April.

Write to Mayumi Negishi at mayumi.negishi@wsj.com

(END) Dow Jones Newswires

June 29, 2016 06:55 ET (10:55 GMT)

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