In our previous column, we explained the rules and regulations relating to the purchase of shares in Japanese companies, particularly, in the most common type of Japanese company, the kabushiki kaisha (“KK”). This column outlines some important regulations regarding the sales or purchase of shares of listed companies. Specifically, we will discuss the mandatory tender offer bid (“TOB”) rules, reporting requirements, restrictions on insider trading, and disclosure rules.
2. TOB Rules
(1) Conditions Triggering Application of the TOB Rules
Under the Financial Instruments and Exchange Act of Japan (“FIEA”), acquirers will be required to make a tender offer if they intend to acquire a certain number of issued shares in a KK subject to continuous disclosure in the following conditions. The term “issued shares” here includes shares with voting rights and other equity securities, such as share options or bonds with share options, which provide a right to acquire shares with voting rights.
It is important to note that the TOB rules apply only to target companies which are obliged to file an annual securities report (yukashoken hokokusho) under the FIEA. The typical and most numerous example is a company listed on a Japanese stock exchange. However, there are some companies in Japan which are required to file an annual security report even though they are not listed on a Japanese stock exchange. Such non-listed companies are also subject to the TOB rules.
(a) Purchasing more than Five Percent (5%)
When an acquirer purchases shares in a target KK outside the market and will, after the acquisition, own more than five percent (5%) of the voting rights in the target company, the acquirer must make a TOB. The TOB is required not only in the cases where the total voting rights of the acquirer exceed five percent (5%) due to the acquisition, but also in the cases where the acquirer already owns more than five percent (5%) before the acquisition and will acquire additional voting rights. However, if such acquirer purchases shares in the target company outside the stock exchange market from no more than ten sellers in total within sixty days (such purchases are below referred to as “Small Off-Market Purchases”), the acquirer is not required to make a TOB even if the acquirer will obtain more than 5% (but not more than one-third) of the voting rights after the acquisitions.
|(b) Purchasing more than One-Third (1/3) by Small Off-Market Purchases
Even when an acquirer purchases shares by means of Small Off-Market Purchases, it must still make a TOB if the acquirer will own more than one-third (1/3) of the voting rights in the target company after the acquisitions. The TOB is required not only in cases where the total voting rights of the acquirer exceed one-third (1/3) due to the acquisition, but also in cases where the acquirer already owns more than one-third (1/3) of the voting rights before the acquisition and will acquire additional voting rights.
In other words, when an acquirer purchases shares in a target company outside the market, it can purchase them without making a TOB for up to one-third (1/3) of the shares if such purchase falls under the category of Small Off-Market Purchases. Thus, in practice, the most important threshold to determine whether a tender offer is legally required when making Small Off-Market Purchases is the post-acquisition voting rights limit of one-third (1/3) of all voting rights.
|(c) Purchasing more than One-Third (1/3) through certain Off-Floor Trading Systems
When an acquirer (i) purchases shares through a certain off-floor trading system run by a Japanese stock exchange market specified by the Financial Services Agency, such as ToSTNeT which is managed by the Tokyo Stock Exchange, and (ii) would own more than one-third (1/3) of the voting rights in the target company after the acquisition, the acquirer must make a TOB.
|(d) Combination of Acquisitions
When (i) an acquirer acquires shares with more than ten percent (10%) of the voting rights in a target company in total through off-market purchases, market purchases and/or new issuances of shares within a three month period, (ii) such acquisitions in the three-month period includes off-market purchases with more than five percent (5%) of the voting rights, and (iii) the acquirer will own more than one-third (1/3) of the voting rights in the target company after such acquisitions, the acquirer must make a TOB for such purchases.
|(e) Purchasing more than Five Percent (5%) with another Tender Offer Ongoing
If (i) a third party (“First Acquirer”) has already commenced a TOB for shares of a certain target company and (ii) another acquirer (“Second Acquirer”) holding shares with more than one-third (1/3) of the voting rights in that target company seeks to additionally purchase more than five percent (5%) of the shares within the offering period set by the First Acquirer, the Second Acquirer must also make a TOB, even for purchases made on the stock market.
(2) Overview of the TOB Procedures
If acquirers meet the above conditions, they will be required to make a tender offer under the TOB rules. Some important TOB procedures are set forth below.
|(a) At the beginning of the TOB, a public notice of the commencement of the TOB (kokaikaitsuke kokoku) and a registration statement for the TOB (kokaikaitsuke todokedesho) must be filed.|
|(b) The TOB period must be 20 or more business days and must end not more than 60 business days from the day on which the public notice of the commencement of the TOB is made;|
|(c) a tender offeror can specify the minimum number of shares tendered to complete the TOB and/or maximum number of shares planned to be purchased by the offeror;|
|(d) the terms and conditions of the TOB, including the purchase price, must be uniform for all shareholders (please note that a tender offeror cannot lower such purchase price during the TOB period); and|
|(e) if a tender offeror intends to acquire two-thirds or more of the voting rights, the tender offeror is required to make a tender offer for all voting rights tendered.|
(3) Tender Offer Agreement
It is not rare that a tender offeror negotiates and enters into an agreement with certain large shareholders before the commencement of the TOB. This agreement is generally called a tender offer agreement (kokaikaitsuke obo keiyaku). Tender offer agreements are functionally similar to share purchase agreements, including the content of the representations and warranties. Under this type of agreement, the tender offeror is bound to make a tender offer in accordance with certain terms and conditions, and the large shareholders who are parties to the agreement agree to sell a certain number of shares, should the tender offer take place.
(4) Exchange Tender Offer
Exchange tender offers, or tender offers in which the tender offeror’s shares are given as consideration instead of cash, are not prohibited under the FIEA. However, acquirers rarely make exchange tender offers. The main barrier to this type of the tender offer is tax concerns for the tendering shareholders under the tax law of Japan.
3. Reporting Requirements for Shareholder Reports
Although the Japanese laws provides for certain types of shareholder reports, foreign shareholders are most likely to encounter a Large Volume Shareholding Report.
(1) Large Volume Shareholding Report - 5% Rule
Large Shareholders – meaning shareholders who “hold” more than “5%” of the shares of a company listed on a Japanese stock exchange, alone or together with a “Joint Shareholder” – must file a Large Volume Shareholding Report (tairyohoyu hokokusho) with the competent Local Finance Bureau within five business days of becoming a Large Shareholder, as required under the FIEA. The Large Volume Shareholding Report must include, among other matters, the shareholding ratio and the purpose of the shareholding of the Large Shareholder. The Large Volume Shareholding Report may only be filed electronically and must be filed through the website “EDINET” (http://disclosure.edinet-fsa.go.jp/). Upon filing, the report will be publicly disclosed on the EDINET webpage. The meanings of the words with the quotation marks are as follows:
“Hold” - a person is typically deemed to “hold” shares when the person (a) owns the shares in his/her own name, the name of another person, or (b) holds the right to request delivery of share certificates or similar documents under a sales and purchase contract or similar document.
“Joint Shareholder” - a person or entity is typically deemed to be a “Joint Shareholder” in cases where a shareholder has agreed to jointly acquire or transfer shares, or to jointly exercise the voting rights and other shareholder rights, with another shareholder.
“5%” – the 5% threshold is calculated based on the number of shares and not the number of voting rights held by the shareholder. The same is true of the 1% threshold discussed below.
(2) Change Report - 1% Rule
If there is any change of 1% or more in the shareholding ratio of a Large Shareholder, the Large Shareholder must file a Change Report (henko hokokusho) setting out the change in the Large Shareholder’s shareholding. This obligation to file Change Reports continues for as long as the shareholder remains a Large Shareholder (i.e., owns 5% or more of the shares in the listed company).
As with the Large Volume Shareholding Report, the Change Report must also be filed with the competent Local Finance Bureau within five business days of the 1% change in the shareholding ratio through the website EDINET and, upon filing, will be publicly disclosed on the EDINET webpage.
4. Insider Trading Regulations
Any Insider (defined below) having knowledge of nonpublic material information is not allowed to trade shares in a listed KK until and unless the material information has been publically disclosed.
(1) Material Information
The following items are deemed to be inside information for the purpose of the regulations on insider trading (“Material Information”). However, some may have numerical thresholds which are designed to exclude facts which are not significant.
(a) Information relating to Decisions
The fact that a decision-making body of a listed company decides to perform or not perform (limited to acts that have already been publicized) certain acts is deemed to be Material Information. However certain facts that may have only a minor influence on investors’ investment decisions are deemed not to be Material Information, and thus are beyond the scope of the insider trading regulations (the “Minor Influence Rule”).
Some typical examples that fall under this category are decisions to perform or not perform any of the following:
(i) issuing new shares and disposition of treasury stock;
(ii) a dividend of surplus;
(iii) a merger, company split, share exchange, or share transfer;
(iv) a business alliance; and
(v) a transfer or acquisition of shares or equity involving changes in a subsidiary company, etc.
|(b) Information relating to the Occurrence of Material Events
The occurrence of certain events with respect to a listed company is deemed Material Information unless the above-mentioned Minor Influence Rule applies. Some examples that fall under this category are as follows:
(i) damages suffered due to natural disasters or during the course of business;
(ii) changes in composition of major shareholders; and
(iii) facts which are cause for de-listing of listed shares, etc.
|(c) Information relating to Financial Results
A material change in the most recent published forecasts (or publicized actual figures of the preceding business year in the case that there are no such forecasts) of sales, current profits or net income, or dividends of a listed company, or sales, current profits, or net income of the corporate group to which the listed company belongs as seen in the revised forecasts or the settled accounts of a fiscal year is deemed to be Material Information unless the above-mentioned Minor Influence Rule applies.
|(d) Basket Clause
In addition to the foregoing matters in (a) through (c), any material fact that would significantly affect the investment judgment of investors relating to the operation, business, or assets of a listed company is deemed to be Material Information.
Under the FIEA, the insiders who are subject to the prohibition on trading securities of a public company with non-public information are Corporate Insiders and Recipients of Information, as discussed below.
(a) Corporate Insiders
The below are primary examples of Corporate Insiders:
(i) Officers, agents, employees or other workers (“Officers”) of the listed company, its parents, or its subsidiaries (“Listed Company”) who acquire Material Information in performing their duties and functions;
(ii) Persons or entities, other than the Officers of the Listed Company, who have executed or have participated in negotiations with regard to a contract to which the Listed Company is a party and who acquire Material Information in the execution, negotiation or performance of such contract; and
(iii) Officers who belong to a corporation which falls under category (ii) who acquire Material Information upon performing their duties and functions.Please note that persons who cease to occupy such Corporate Insiders role continue to be subject to the insider trading regulations for one year after ceasing such role.
(b) Recipients of Information
A Recipient of Information is (i) a person who has received from a Corporate Insider information regarding Material Information that the Corporate Insider has come to know in a manner prescribed in (a), or (ii) an Officer of a legal entity to which a person who has received Material Information in the course of his or her duties belongs, who comes to know such Material Information in relation to his or her duties.
Corporate Insiders and Recipients of Information shall not make sales or purchases of shares of the listed company before the Material Information is publicized, such as a disclosure of the Material Information through the website of the Tokyo Stock Exchange, known as TDnet.
There are certain exemptions to the above-mentioned regulations for insider-trading.
One of the exemptions is the exemption of the so-called “between-insiders trade.” Under this exemption, provided that (a) both the seller and the buyer have the same Material Information and that (b) the buyer will not resell the shares to a third party who does not have Material Information before the disclosure of such Material Information, the insider trading prohibition is not applied to the trade.
Other exemptions include, (i) trading as an exercise of rights, (ii) trading demanded by law, and (iii) trading concluded in performance of a contract for trading the shares which was concluded before the buyer or seller learnt the Material Information, etc.
(4) Information relating to TOB
A similar rule applies to a TOB of shares in a listed KK. The following facts are deemed to be Material Information for the purposes of the regulations on insider trading by TOB-Related Insiders (defined below):
(a) the fact that a tender offeror, etc. has decided to launch a TOB or a collection of securities; and
(b) the fact that a tender offeror, etc. has decided to suspend a TOB or a collection of securities.
“TOB-Related Insider” means any person who has a particular relationship or connection specified in the FIEA with a tender offeror and has learned non-public Material Information about the TOB in a certain non-public manner (such as officers of the tender offeror). TOB-Related Insiders and Recipients of Information are not permitted to make purchases or sales of shares in listed companies before the Material Information is publicized. Please note that persons who cease to occupy such TOB-Related Insider role continue to be subject to the insider trading regulations for six months after ceasing such role.
5. Timely Disclosure and Filing
(1) Timely Disclosure Rule
The rules of the Tokyo Stock Exchange stipulate certain situations in which a listed company must timely disclose relevant information through TDnet. “Timely” in this context means immediately without delay. Some of the situations that trigger these timely disclosure obligations are similar to the Material Information under the insider trading regulations, in particular, (a) an issuance of new shares or sales of treasury shares of the listed company, (b) a transfer or acquisition of shares or equity involving changes in a subsidiary company, and (c) a change in major subsidiaries (i.e., subsidiaries whose amount of stated capital is equivalent to ten percent or more of the listed company's amount of stated capital, etc.) or a change in the major shareholders of the listed company (i.e., shareholders who hold 10% or more of the shares in the listed company), etc. However, some of the above may have numerical thresholds designed to exclude facts which are not significant.
(2) Timely Filing of the Extraordinary Report under the FIEA
In the case of certain events concerning a listed company, such as (a) the issuance of shares whose issuer is a reporting company and which shall be acquired not through a public offering for which the total amount of the issue value pertaining to said acquisition is 100 million yen or more, (b) a change in its major subsidiaries or major shareholders, etc., a listed company must file an Extraordinary Report (rinji hokokusho) with the competent Local Finance Bureau, in a timely manner as required under the FIEA. Extraordinary Reports must be filed electronically through the EDINET. Upon filing, the report will be publicly disclosed on the EDINET webpage.
Purchases of shares of listed companies are very common in Japanese M&A. Although there are various rules governing such share purchases, the law in this area is well-organized. However, the TOB rules, which have thresholds, and restrictions on insider trading are complicated in some ways. Accordingly, if a foreign investor intends to make an investment in shares of listed companies or has information regarding target companies which may be the insider information, it is recommended that the foreign investor seek the advice of Japanese counsel.
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)