In the previous column, we introduced the basic features of Japanese companies that you are likely to encounter in M&A in Japan, in particular the kabushiki kaisha (“KK”), which is the Japanese equivalent of a stock company. In this column, we explain the general rules and regulations relating to the purchase of shares in a KK (some important regulations for purchasing shares in listed KKs will be dealt in the next column). If your Japanese M&A involves a share purchase transaction, it will likely be a purchase of shares in a KK.
2. Procedure for the Purchase of Shares in a Japanese KK
Under the Companies Act of Japan (“Companies Act”), there are two ways to purchase shares in a KK: (1) buying shares from an existing shareholder, or (2) buying newly-issued shares or treasury shares from the share-issuing KK.
(1) Buying Shares from an Existing Shareholder
The existing shareholder, i.e., the seller, and the buyer need to agree to the terms of sale for the shares. Although not required under Japanese law, in practice, it is very common for the parties to execute a written agreement setting out the terms of the share purchase. The terms of such share purchase agreements in Japan are similar to those in foreign jurisdictions and typically include provisions relating to share price and payment, including conditions precedent, representations and warranties as to the title of the shares and/or the target company, covenants as to what the parties will or must not do before and after the transfer, and rights to terminate the purchase in certain circumstances.
The procedure for buying shares from an existing shareholder is relatively straightforward. As a general rule, buying shares from an existing shareholder does not require governmental approvals. However, buying shares from an existing shareholder is subject to the restrictions set out below.
|(a) Delivery of Share Certificates. Nowadays, it is rare for KKs to issue share certificates. However, under the Companies Act, if a foreign investor seeks to buy shares in a KK that does issue share certificates, then delivery of the share certificates is required to complete the transaction under the Companies Act.
|(b) Entry of Book-Entry Transfer Account Register. Although no listed KKs issue share certificates, they have to comply with the special rules for the system for the book-entry transfer of bonds or other securities. If a foreign investor seeks to buy shares in a listed KK, then entry of the book-entry transfer account register is required to complete the transaction.
|(c) Transfer Restriction by the Articles of Incorporation. Under the Companies Act, if a foreign investor intends to buy the shares subject to restrictions on share purchase transactions under the issuing KK’s articles of incorporation, the foreign investor must receive approval from the issuing KK. As a general rule, the board of directors is the organ which must issue approval if the issuing KK is a corporation with a board of directors, while it is the shareholders meeting if the issuing KK is a corporation without a board of directors.
|(d) Entry of Transferee’s Name and Address. Under the Companies Act, a transfer of shares issued by a non-share-certificate-issuing KK may not be asserted against the KK or any third parties without entry of the name and address of the transfer in the shareholder register kept by the KK. A transfer of shares issued by a share-certificate-issuing KK may not be asserted against the issuing KK without entry of the transfer in the shareholder register.
|(e) Parent Company Shareholder’s Approval on Transfer of Shares in Subsidiary. Under the Companies Act, the parent of the target KK must obtain its shareholder’s approval by way of a special resolution at a shareholders meeting (i.e., the resolution shall be made by a majority of two-thirds or more of the voting rights of the shareholders present at the meeting) if a foreign investor intends to buy shares in the target KK and such intended purchase satisfies all of the following conditions:
i. the book value of the shareholding being purchased is more than 20% of the value of the total assets of the parent KK;
ii. upon the effective date of the purchase of the shareholding, the parent KK will not hold a majority of the total voting rights of the target KK; and
iii. the foreign investor does not hold 90% or more of total voting rights of the parent KK.
(2) Buying Shares from a Share-Issuing KK (Subscribing for Newly-Issued Shares or Buying Shares through a Disposition of Treasury Shares)
Under the Companies Act, the same procedure is required to buy shares directly from a share-issuing KK whether buying them as a new issuance of shares or as a disposition of treasury shares.
The KK and a share subscriber/purchaser will typically enter into a written agreement for the issuance of new shares or for the disposal of treasury shares (if the KK has treasury shares) to a limited number of specified investors (referred to as a “Third-Party Allotment” in Japan). It is possible for a KK to issue an allotment of new shares after receiving an offer from a potential subscriber or making an offering through a shareholders allotment, but these are rare compared to issuances in which the agreement is entered into. The regulations governing Third-Party Allotments are set out below.
|(a) Determination. Under the Companies Act, if the target KK is a company subject to restrictions on share purchase transactions (known as a hi-kokai-gaisha meaning a “non-public” company), a special resolution of a shareholder meeting is required to issue new shares or to dispose of treasury shares. On the other hand, if the target KK is not a company subject to restrictions on share purchase transactions (known as a kokai-gaisha meaning a “public” company), approval by a meeting of the board of directors is necessary and, in principle, sufficient to allow the transaction to proceed. However, approval by a meeting of shareholders will also be necessary if the shares are to be issued for a purchase price that is particularly favorable to the subscribers compared to its fair value. It typically takes about two months to prepare a shareholders meeting for a listed KK.
|(b) Change of Controlling Shareholder in Public Corporation. Under the Companies Act, if the following conditions are met, a KK must acquire approval of the transaction at a shareholders meeting. The approval of the shareholders must be established by a majority of the voting rights of the shareholders present at a shareholders meeting which is attended by shareholders holding the majority of the total voting rights possessed by shareholders who are entitled to vote, if:
i. a public KK intends to make an offering of shares, as the result of which a foreign investor for the offered shares will hold a majority of all of the voting rights of the public KK (in this case, the KK shall notify each shareholder or post a public notice with respect to the name and address of such investor and the number of shares to be subscribed for by the foreign investor and prescribed matters at least two weeks prior to the subscription due date); and
ii. shareholders holding an aggregate of 10% or more of the total voting rights of all the shareholders provides a notice to the corporation, objecting to the subscription by the foreign investor within two weeks of the notice by the corporation.
|(c) Securities Registration Statement. If a listed KK issues new shares or disposes of treasury shares, the aggregate price of which is 100 million Japanese yen or more, and the same class of shares has already been listed, a securities registration statement is generally required. The securities registration statement becomes effective after fifteen days have elapsed from the day on which the securities registration statement submitted was accepted. A securities registration statement is available for public viewing on-line at the website known as “EDINET” and generally contain the following:
i. details of the transaction: the name of the purchaser(s) and conditions of purchase, including price and volume of shares to be issued or disposed of, date of issue or disposal etc.; and
ii. details regarding the issuing or disposing KK: the trade name of the KK, the financial conditions of the corporate group to which the KK belongs and other matters specified in the relevant regulations concerning the KK’s business.If the total price of the solicited shares is less than 100 million Japanese yen and more than 10 million Japanese yen, it is generally required to make a written notice of securities, which is not available for public viewing and the content of which is simpler than that of a securities registration statement.
|(d) Third Party Allotment under the Tokyo Stock Exchange’s Regulations. The regulations of the Tokyo Stock Exchange which apply to listed KKs set forth the following regulations:
i. if a Third-Party Allotment offers voting shares corresponding to 25% or more of the existing issued voting shares or that changes the control of the corporation, the KK must obtain an opinion regarding the necessity and suitability of such allotment from a committee independent of the management or obtain consent of the shareholders, with the exception of emergencies;
ii. a Third-Party Allotment offering voting shares corresponding to 300% or more of the existing issued voting shares may result in delisting except for cases that the stock exchange deems that it is unlikely to undermine the interests of shareholders and investors;
iii. a change in the controlling shareholder resulting from a Third-Party Allotment may result in delisting if the stock exchange deems that the “soundness of the transactions” with such new controlling shareholder is considerably damaged within the three years following (the “soundness of the transactions” with a controlling shareholder is determined in comprehensive consideration of the reasonability of the transactions, the appropriateness of the transaction terms, and any other circumstances.); and
vi. a listed company must execute a written assurance with an allotted foreign investor, which must include a pledge that if the foreign investor transfers the stocks that were allotted to it within two years from the day on which such allotment was received, the foreign investor shall report the details of the transfer in writing to the listed company immediately and submit a document certifying the execution of the assurance to the Tokyo Stock Exchange immediately after the Third-Party Allotment takes place.
3. Share Price
There are no specific restrictions on the share price for share purchases from existing shareholders unless tender offer regulations apply (which will be dealt with in the next column). In contrast, there is a restriction on the share price when issuing shares or disposing of treasury shares in a public company. As stated in Section 2.(2)(a), while a special resolution of a shareholder meeting is required for a non-public company to issue new shares or to dispose of treasury shares, approval by a meeting of the board of directors is sufficient for a public company to issue shares, in principle. However a special resolution by a meeting of shareholders is necessary for a public company as well if the shares are to be issued for a purchase price that is particularly favorable to the subscribers compared to its fair value.
If a public company is a non-listed KK, determining the “fair value” of shares in the KK can be difficult, as there are no market price.
If a public company is a listed KK, its market price is typically used to determine the fair value. However, in cases where the market price has fluctuated rapidly due to speculation over a period of time, it is sometimes necessary to adapt the calculations for fair value. Taking into account the volatility of the market price, the voluntary rules formulated by the Japan Securities Dealers Association are widely used in practice as the basis to determine the fair value in listed shares. There are cases where the Japanese courts have also approved valuations based on the Japan Securities Dealers Association’s rules. Under these rules, the fair value is calculated as follows:
|(a) fair value is considered to be a price at or above the share price in the market on the day immediately before the day when the board of directors made the decision to issue the shares (“the Day Before the Issuance Decision”), multiplied by 0.9 (if the market is not open at that time, the market price of the latest day upon which the market was open before the day when the board of directors made the decision to issue the shares is to be used (“the Latest Market Day Before the Issuance Decision”)); however,
|(b) if, considering the share prices or the sales volumes for the shares up until the Day Before the Issuance Decision or the Latest Market Day Before the Issuance Decision, it appears that (a) may not be an appropriate measure of fair value, then fair value may be considered to be a price at or above the average of the share prices on the days between when the board of directors made the decision to issue the shares and a day appropriately chosen within the six months before the day on which the board of directors decided to issue the shares, multiplied by 0.9.|
Nonetheless, fair value depends on the particular situation surrounding the listed KK and the transaction, and therefore we recommend that you consult your financial advisor and lawyer when you consider subscribing to new shares of a KK.
4. Investment Regulations for Foreign Investors
Under the Foreign Exchange and Foreign Trade Act of Japan (“FEFTA”), as a general rule, if a foreign investor obtains shares in a non-listed KK from persons who are not other foreign investors, or a foreign investor obtains 10% or more of all issued and outstanding shares in a listed KK, then the foreign investor must report the transaction to the Bank of Japan after the transaction, no later than the 15th day of the month after the month in which the share purchase occurs.
However, if the target company engages in certain industries specified under FEFTA or other relevant regulations, then notification must be given to the Minister of Finance and the other specified individual through the Bank of Japan within six months before the date of the share acquisition. Further, a party who submits such a notification may not transfer the shares until 30 days have passed from the date of delivery of such a notification. During this period, the Minister of Finance and the other specified individual screen the proposed investment from the viewpoint of national security. Generally, the industries for which prior notification is required are those which potentially affect the functions of the government, such as defense and energy supply. Although rare, there have been examples where the government has recommended that the transfer of shares be suspended.
Moreover, an amendment to FEFTA, which becomes effective October 1, 2017, provides that if a foreign investor obtains shares in a non-listed KK from foreign investors, the foreign investor must notify or report the transaction after or before the transaction in accordance with the above classifications.
5. Anti-Competition Laws
Foreign corporations must file a notification seeking approval from the Japan Fair Trade Commission (“JFTC”) if the requirements under the Act on Prohibition of Private Monopolization and Maintenance of Fair Trade and other anti-competition laws in Japan listed below are applicable to a share purchase transaction:
|(a) the sales in Japan of the foreign corporation in the most recent business year exceed 20 billion yen and the sales in Japan of the seller and its subsidiaries exceed 5 billion yen; and
|(b) the foreign corporation intends to obtain more than 20% of the voting rights of a KK or obtain more than 50% of the voting rights when the foreign investor already has more than 20% of the voting rights of the KK.|
In calculating (a), “the sales in Japan of the foreign corporation” means the total value of goods and services sold by the foreign corporation’s group of combined companies in Japan. “Combined companies” is defined as the group consisting of the purchaser, its subsidiaries, its ultimate parent company which is not a subsidiary company of another company, and subsidiary companies of this ultimate parent company (excluding the purchaser and the purchaser’s subsidiaries). In calculating (b), treasury shares are not included because companies may not exercise voting rights with respect to treasury shares.
The JFTC must provide its initial determination within 30 days from the date of the receipt of notification (the waiting period). If the JFTC determines that the transaction will have no or a negligible adverse impact on competition in the market, then the transaction will normally be approved within that time frame. The parties may not conduct the transaction during this waiting period. If, however, the JFTC has concerns, then the JFTC’s review will continue and the JFTC will likely request further reports containing more information on the case. Under such an extended review, the JFTC will determine whether or not the case should be approved within 90 days from the last date when all such further reports have been filed.
Share purchase transactions are very common in Japanese M&A. Although there are various rules and some potential anti-competition laws governing Japanese share purchases, the law in this area is well-organized and objectively reasonable. So long as the rules are followed, foreign investors generally will have little difficulty buying shares in Japanese KKs.
University of Southern California Gould School of Law (LL.M., 2016/Graduate Certificates in Business Law and Entertainment Law) University of California, Davis, School of Law (LL.M., 2015) Keio University (LL.B., 2000)
The International Comparative Legal Guide to: Mergers & Acquisitions 2010 (Japan Chapter), etc.
Areas of Practice:
M&A, Joint Ventures, Startups & Venture Capital, Corporate Governance, Robotics/Artificial Intelligence, Personal Data & Privacy/Big Data, etc.
Kyoto University (LL.B., 2013)