Paperless share system and M&A

Effective from January 5 2009, the Electronic Share Certificate System (paperless share system) under the amended Law Concerning Book-Entry Transfer of Corporate and Other Debt Securities (Law 75 of 2001, as amended) (Law) is expected to start in Japan. After implementation, no share certificates of listed companies in Japan will be issued. The main purpose of the system is to contribute to safety, efficiency and convenience for users. It will, for instance: (i) reduce the risk of share certificates being lost, stolen or forged; (ii) reduce the cost of share certificates regarding issuance, delivery and changing title in the shareholders' register; and (iii) make the management of shareholders more efficient.

Outline

By the time of implementation, all paper share certificates of listed issuers will become invalid (however, note that the share certificates will not be collected). Trading of the shares, and the shareholders, will be managed electronically through trading accounts (transfer account, furikae kouza), and the books of the transfer account will be referred to as the transfer account book (furikae kouzabo) at financial institutions such as securities companies (account management institutions, kouza kanrikikan). Also, the shares represented by share certificates that are deposited with the Japan Securities Depository Center Inc (JASDEC) (Hofuri) will be recorded in a transfer account book. On the other hand, shares represented by share certificates that are not deposited with JASDEC will be recorded in a special account (tokubetsu kouza) in the name of the registered shareholder.

At time of implementation

In addition to the effect on M&A activities following implementation, it should be noted that M&A activities involving listed issuers will be restricted around the time of implementation due to legal and practical reasons.

After implementation

Issuance of new shares

When new shares are issued to a third party as one of the methods of M&A activities, third party allotment is most typically used. In general, third party allotment is completed in the following ways: (i) determination of terms and conditions of issuance of new shares by the board of directors; (ii) approval of the shareholders' meeting (if necessary); (iii) allotment or subscription of new shares; and (iv) payment of subscription fee. After implementation, new shares must be recorded in a transfer account book of the subscriber after step (iv). In order for the new shares to be recorded, the subscriber must notify the issuer of its transfer account book to have the subscribed new shares recorded after step (iv). In practical terms, the subscription agreement or the forms of subscription that are typically used in step (iii) should provide space for the transfer account book of the subscriber.

Transfer of shares

General

Generally, transfer of shares in the form of a company issuing share certificate will not become effective unless the share certificates representing such shares are delivered. Following implementation, no listed issuer will be a company issuing share certificate, and every transfer of listed shares will become effective when the transfer is recorded in the transfer account book of the assignee. However, in order to sell the shares recorded in a special account, the assignor is required to open a transfer account at an account management institution and transfer the shares from a special account to a transfer account before transferring the shares to third parties.

Tender offer

Under the system, a tender offer is only one method of share transfer. Therefore, the same issues as explained in the previous paragraph will apply, even though there might be some other technical issues relating to a tender offer settlement mechanism that may need to be solved.

Squeeze-out

If a party intends to acquire all shares of the listed issuers, the acquirer often performs squeeze-out procedures after a tender offer. For this purpose, class shares subject to wholly call (zenbu shutoku jyoko tsuki shurui kabushiki) is typically used. The following three resolutions are necessary in the shareholders meeting to squeeze-out minority shareholders through class shares subject to wholly call: (i) change the target company to a company with class shares by amendment of the articles of incorporation; (ii) add wholly call provisions to all common shares by amendment of the articles of incorporation; and (iii) acquire all common shares (with wholly call provisions) in exchange for another class of shares in the ratio by which minority shareholders cannot receive another class of shares but can only receive the cash equivalent to the fractions of another class of share. Minority shareholders will be cashed out in this way when the acquisition of common shares becomes effective. The three resolutions can be made in a single shareholders' meeting, and both the amendments of the articles of incorporation and the acquisition of class shares subject to wholly call are required to be made by special resolution (adopted by no less than two-thirds of the voting rights of attending shareholders).

Implementation will have several effects on the squeeze-out procedure using class shares subject to wholly call.

First, the period necessary for calling a shareholders' meeting could be shortened. Generally, in the process of calling a shareholders' meeting (including an extraordinary shareholders' meeting), the company establishes a record date, which means that the company may treat the persons who are stated or recorded in the shareholder registry on the prescribed record date as the shareholders who may exercise their rights at the relevant shareholders' meeting. Before implementation, it took around three to four weeks after the record date for the company to recognise the beneficial shareholders of the relevant record date. However, after implementation the information of all beneficial shareholders would, in principle, be notified to the company (so-kabunushi tsuchi) on the fourth business day after the record date. Therefore, it will be possible for the company to hold the shareholders' meeting and shorten the entire squeeze-out process by two to three weeks.

Second, both public and individual notices and the one-month period to request that shareholders submit their share certificates would be unnecessary. Under the Companies Act, in order for a company issuing share certificate to change its articles of incorporation to add wholly call provisions, it will, by more than one month before the day when it takes effect, give both public notice and individual notice to request that the relevant share certificates be submitted. However, because the listed issuer will not be a company issuing share certificate after implementation, this procedure is not necessary. It should be noted that, practically speaking, the entire time period necessary for the squeeze-out procedure would not necessarily be shortened due to this effect, as it usually requires more than one month between the date of the shareholders' meeting and the effective date of the acquisition of shares.

Third, the company is required to make several notices to JASDEC. These notices are required to be made, among others: (i) when the record date is established; (ii) when the resolution of convocation of the shareholders' meeting is made; and (iii) two weeks before the acquisition date if non-listed shares will be delivered as a consideration of wholly call.

Merger, share exchange and share transfer

Under the Companies Act, a listed issuer could become one of the parties to absorption-type merger (kyushu gappei) or stock for stock exchange (kabushiki koukan) (collectively, absorption-type merger etc), consolidation-type merger (shinsetsu gappei) or share transfer (kabushiki iten) (collectively, consolidation-type merger etc), which are corporate reorganisation procedures and are used as methods of M&A.

After implementation, certain procedures required for absorption-type merger etc and consolidation-type merger etc under both the Companies Act and the Law would be affected.

Effect on procedures under Companies Act

In general, the approval of the shareholders' meeting is required for absorption-type merger etc and consolidation-type merger etc. As discussed above, the necessary time period for the convocation of the shareholders' meeting will be shortened by two to three weeks, which may shorten the entire time period for absorption-type merger etc and consolidation-type merger etc. Also, both public and individual notices, and the one month-plus period to request that shareholders submit their share certificates, will become unnecessary for listed issuers.

Effect on procedures under the Law

The necessary procedure under the Law differs depending upon whether the share certificates of the relevant parties are paper shares or electronic shares (furikae kabushiki).

Pattern (a)

In this pattern, the process would become complicated because all shareholders of the expiring company etc must come under the control of the new system.

In a case where a surviving company etc transfers new electronic shares to the shareholders of the expiring company etc by no later than one month before the effective date of consolidation-type merger etc or the date of incorporation of the incorporated company etc (collectively, merger etc effective date), the expiring company etc will send notification to its shareholders to notify certain matters, including a transfer account of that shareholder for the newly issued electronic shares to be recorded. In a case where the shareholders of the expiring company etc do not respond to the above notification until the merger etc effective date, the surviving company etc or the incorporated company etc will apply to JASDEC to open a special account for the relevant shareholders. Also, without delay after the merger etc effective date, the surviving company etc or the incorporated company etc is required to provide JASDEC with a new record notice (shinki kiroku tsuchi) to record the newly issued electronic shares to a transfer account or a special account, as applicable.

In a case where the surviving company etc transfers its electronic treasury shares to the shareholders of the expiring company etc, the surviving company etc will apply to JASDEC to transfer its shares to a transfer account or a special account of the shareholders of the expiring company etc, as applicable.

Pattern (b)

In this pattern, the procedure would be simple because the expiring company etc's shareholders will not be under the control of the new system.

In order to be beyond the system's control, the expiring company etc will, by no later than two weeks before the merger etc effective date, notify JASDEC of the relevant electronic shares and the merger etc effective date. After such notice, JASDEC will delete all records of the relevant electronic shares on the merger etc effective date.

Pattern (c)

Basically, this pattern combines patterns (a) and (b), but the procedure is simplified under the Law.

The expiring company etc will, by no later than two weeks before the merger etc effective date, notify JASDEC with: (i) a description of the electronic shares to be delivered to the shareholders of the expiring company etc; (ii) a description of the electronic shares of the expiring company etc; (iii) the percentage of the total number of the electronic shares of (i) against the total issued number of the electronic shares of (ii); and (iv) the merger etc effective date, among other things. By receiving this notice, JASDEC will, on the merger etc effective date, increase the amount of the electronic shares of (i) recorded in a transfer account or special account by the figure calculated by the amount of the electronic shares of (ii) multiplied by the percentage of (iii) and delete all records of the electronic shares of (ii).

Corporate split

Under the Companies Act, a corporate split (kaisha bunkatsu) is another method of corporate reorganisation used in M&A activities. Following implementation, the procedure under the Law will be different only when the succeeding company (shoukei kaisha) issues electronic shares. In this case, a transfer account for the splitting company (bunkatsu kaisha) to transfer the electronic shares of the succeeding company will be determined in the corporate split agreement. Then the succeeding company will perform actions similar to the actions of the surviving company under the Law (outlined above) to newly record or transfer the shares. However, please note that this procedure will be complicated if the shares of the succeeding company are to be distributed as dividends to the shareholders of the splitting company on the effective date of the corporate split.

Dissenting shareholders' demand for purchase of shares

Under the Companies Act, in order to protect the shareholders' right to dissent to corporate reorganisation procedures or changes to certain terms in the articles of incorporation, shareholders are generally entitled to the appraisal right (kabushiki kaitori seikyu ken). When exercised, shareholders can demand that the company purchase their shares at a fair price. In an absorption-type merger etc, the appraisal right could be exercised from 20 days before the effective date of the corporate reorganisation procedures to the day before the effective date. However, in a case where such a request is made immediately before the effective date, the consideration of the exercised shares could be delivered to the exercised shareholders because the Law does not require the shareholder to notify JASDEC when it exercises its right. In many cases the shareholders are likely to exercise their right immediately before the effective date so that they can consider the movement of the stock price until the very last moment. Practically speaking, then, liaison between the company and JASDEC would be essential to avoid the issue. However, JASDEC's solution to this issue has not been announced as at the time of writing.

Advice for shareholders of listed issuers

Although the changes directly made by the Law are relatively technical, there are certain substantial effects on M&A activities. Therefore, the related parties (including shareholders) of M&A activities involving listed issuers should carefully consult with legal advisers when such activities are planned.

Author biographies

Takashi Toichi Anderson Mori & Tomotsune Takashi Toichi is a partner at Anderson Mori & Tomotsune. He specialises in M&A (public, private, domestic and cross-border transactions), restructuring, private equity and related financial transactions. He also provides advice to a variety of clients on various general corporate matters, especially the Companies Act and the Financial Instruments and Exchange Law. Takashi received his LLM from Columbia University (2005), his MSc in finance from London Business School (2006) and his LLB from Keio University (1998). He is admitted to practice law in Japan (2000) and New York (2006). Takashi has published various articles on M&A-related topics. He has also given various seminars and lectures on M&A with a focus on recent M&A practice. Yosuke Fujisawa Anderson Mori & Tomotsune Yosuke Fujisawa is an associate of Anderson Mori & Tomotsune. His practice focuses on corporate law, including M&A, and finance law, including financial transactions and financial regulatory issues. Yosuke received his LLB from Keio University (2002). He is admitted to practice law in Japan (2003) and was seconded to a US investment bank between June 2007 and June 2008. Yosuke is a member of the Dai-ni Tokyo Bar Association in Japan. His native language is Japanese and he is fluent in English.