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Japan: Listing regulations on rights offerings

Cao Minh Thi
The Tokyo Stock Exchange (TSE) has amended part of the Securities Listing Regulations as of October 31 2014. The amendment is intended to change the listing requirements for stock acquisition rights as a rights offering.

A rights offering is a capital increase method using the gratis allotment of stock acquisition rights to existing shareholders. A rights offering where an issuer and a securities company enter into an agreement by which the securities company commits to acquire and exercise the stock acquisition rights that are not exercised within a certain period is called a commitment-type rights offering, while a rights offering under which there is no such agreement is called a non-commitment-type rights offering.

In Japan, rights offerings used to be extremely rare. However, their use has accelerated in recent years, although most have been the non-commitment type.

Rights offerings are generally considered to be a capital increase method more beneficial to existing shareholders than the conventional methods (public placement and private placement). However, it had drawn attention to the fact that by using the non-commitment type rights offering, companies unable to secure funding via the conventional capital increase method were able to issue a large number of new shares without a third party evaluation of the rationality of the capital increase. This was seen as harmful to shareholders, and the amendment addresses that issue.

Under the new listing requirements, in order to list stock acquisition rights as non-commitment type rights offerings, two criteria must be met. The first requires: (i) examination of the reasonableness of the capital increase by a securities company that is a trading participant in TSE; or (ii) procedures confirming the intention of shareholders, such as a general meeting of shareholders. The second requires that, regarding the business results and financial conditions of the issuer: (i) there is at least one business year recording positive ordinary income, during the most recent two years; and (ii) there are no liabilities in excess of assets as of the end of both the most recent business year and quarterly accounting period.

In addition, the listing date of stock acquisition rights should be the day after the first day of the exercise period of the rights, which is intended to ensure a fair price formation.

Cao Minh Thi

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