SPCs under company law

Author: | Published: 1 Dec 2005
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Nagashima Ohno & Tsunematsu

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JP Tower, 2-7-2 Marunouchi
Chiyoda-ku, Tokyo 100-7036
Japan

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+81 3 6889 7000

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Japan's new Company Law, which is expected to be implemented in May 2006, will replace and significantly modify the current provisions of the Commercial Code that relate to companies. The new Company Law will probably have an impact on the type of entities used as special purpose companies (SPCs) in securitization transactions.

KK and YK

At present Japan has two corporate entities that are used for general business purposes and provide equity holders with limited liability. They are joint stock companies (kabushiki kaisha, or KK) established under the Commercial Code and limited liability companies (yugen kaisha, or YK) established under the Limited Liability Company Law (YK Law). Of these, YKs have been more commonly used in securitization transactions because they, unlike KKs, are not subject to the Corporate Reorganization Law (similar to Chapter 11 in the US) and, compared with KKs, have less demanding corporate governance and stated capital requirements. Also, US investors prefer YKs as they may be treated as disregarded entities or partnerships for US income tax purposes, while a KK is regarded as a corporation for the same purposes.

Abolishment of YK Law

When the new Company Law comes into effect, the YK Law will be abolished and no new YKs can be established. All existing YKs will automatically become a KK under the new Company Law (otherwise known as a Special YK). Unless a Special YK elects to become an ordinary KK, certain provisions of the abolished YK Law will continue to apply, therefore, Special YKs will retain most of the characteristics of a YK under the old YK Law. However, all Special YKs and ordinary KKs will be subject to the Corporate Reorganization Law, and Special YKs may not be eligible for pass-through taxation for US income tax purposes.

GK (Japanese LLC)

The new Company Law will introduce a new corporate entity called a limited liability corporation (godo kaisha, or GK). A GK is similar to an LLC in the US as it combines limited liability for its members with a flexible management structure. Many of the existing YKs used as SPCs are expected to be converted into GKs because the Corporate Reorganization Law will not apply to GKs. A GK is expected to be an eligible entity under the US's so-called check-the-box regulations, but, in the same way as a KK or YK, pass-through taxation will probably not be applicable to a GK for Japanese income tax purposes. Unlike a current YK, a GK may issue bonds. Also, a GK will not be required to appoint corporate auditors or independent auditors, which a KK would be required to do if its debts were at least JPY 20 billion ($168 million).

 


 

 

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