On April 19 2019, the Financial Services Agency of Japan published the Cabinet Order to Partially Amend the Order for Enforcement of the Financial Instruments and Exchange Act (draft). Of these proposed amendments, this article examines the amendment concerning disclosure regulations that relate to share compensation. Please note that, as of May 31 2019, the effective date of the proposed amendments has not been announced, and the content of the proposed amendments may change.
The Financial Services Agency explained the purpose behind the proposed amendment to the disclosure regulations relating to share compensation. It was prepared in light of the recent increase in the number of companies issuing restricted shares (that is, shares that are subject to transfer restrictions for a certain period of time), which results from the increase in the use of share compensation as a form of performance-based compensation to incentivise management and others.
With respect to an offering by a listed company of securities whose total issue price is JPY 100 million or more, the submission of a securities registration statement is required. However, under the proposed amendment, when certain conditions are satisfied, the listed company will be able to submit an extraordinary report instead of a securities registration statement. Unlike securities registration statements, it is not required that extraordinary reports are accompanied by prospectuses, thus substantially reducing the burden on the issuer. The conditions mentioned above relate to cases where the counterparties to the offering have already obtained, or can easily obtain, information concerning matters pertaining to the offering, and so on, and are specified in a Cabinet Order. Presently, these specified cases are limited to certain stock acquisition rights, among other things, that meet certain requirements. However, the proposed amendment will widen the scope of these specified cases to include share compensation given by listed companies that satisfy the criteria set forth below.
The criteria mentioned above are as follows: (i) the counterparties to the offering must comprise the directors, accounting advisors, company auditors, executive officers or employees of either the issuer, a wholly-owned subsidiary of the issuer, or a wholly-owned sub-subsidiary of the issuer; and, (ii) the shares to be issued must be subject to transfer restrictions for a period exceeding three months (six months in the case of a foreign company) after the end of the business year during which the shares are to be handed over.
With respect to offerings by listed companies of restricted shares with a total issue price of between more than JPY 10 million and less than JPY 100 million, listed companies are presently required to submit a securities notice. If the proposed amendment is implemented, the listed companies will no longer be required to provide the securities notice if the aforesaid criteria are satisfied.
If the proposed amendment comes into effect, subject to the above criteria being satisfied, there will be substantial procedural changes. Therefore, companies should monitor developments in this area to ensure compliance with the applicable regulations.
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Gaku Oshima |