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Japan: Restricted stock

Yoshitaka Kato

On April 28 2016, the Ministry of Economy Trade and Industry published a practice guide for the introduction of restricted stock as a new incentive award for directors and executive officers in Japan. The introduction of restricted stock is a common performance-based award in western countries. According to the practice guide, it will enable Japanese companies to globally acquire highly-talented management personnel and manage this personnel in a uniform way. Additionally, the Japanese Corporate Governance Code, which the Tokyo Stock Exchange published in 2015, provides that in order for management remuneration to operate as a healthy incentive for sustainable growth, the proportion linked to mid- to long-term results and the balance of cash and stock should be set appropriately.

Therefore, the government expects that listed companies will use restricted stock as a new way to comply with the code.

For the purpose of introducing restricted stock, the government is amending the relevant acts and ordinances. For example, the government has amended the relevant tax laws and ordinances so that companies can easily adopt restricted stock as an incentive award for directors and executive officers. Under the amended Income Tax Act, when directors or executive officers obtain certain stocks subject to a transfer restriction meeting the relevant terms and conditions, such directors or executive officers will be taxed when the transfer restriction is lifted rather than when the company grants the stocks.

Additionally, on June 24 2016, the Financial Services Agency published a bill to revise the Cabinet Office Ordinance on Disclosure of Corporate Affairs. The purpose of this revision was to exclude restricted stock from the definition of 'allocation to third party' so that, unlike in the case of an ordinary allocation to a third party, listed companies are not required to disclose detailed information regarding the directors or executive officers to whom the issued stocks are to be allotted.

The government's insistence on promoting the introduction of restricted stock will lead many listed companies to consider the introduction of this new incentive award. Through this consideration, the legal practice regarding performance-based awards, including restricted stock, will further progress in Japan.

Yoshitaka Kato

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