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Expansion of English-language disclosure rules

Kai Hoshino
The Financial Instruments and Exchange Act of Japan (FIEA) and the relevant cabinet office ordinance were amended, effective as of April 1 2012, to expand the English-language Disclosure Rules. Under the amended Rules, foreign companies may file both primary and continuous disclosure documents in English, together with limited Japanese translations and certain defined supplementary documents. The amended Rules are expected to substantially reduce the burden of Japanese-language disclosure obligations on foreign issuers.

In Japan, subject to certain exceptions, companies that offer shares, stock acquisition rights, bonds and certain other financial instruments to the public are required to file a Securities Registration Statement with the Japanese authorities. Upon doing so, the company will become subject to the continuous disclosure regime, which includes the filing of a number of FIEA documents: an annual securities report, a semi-annual report or quarterly reports, and extraordinary reports. Those foreign companies that elect to satisfy all disclosure obligations in Japanese generally prepare the FIEA documents by translating into Japanese the disclosure documents submitted by such company in its home jurisdiction. This can be very onerous as it involves the translation of, among other items, the description of the company's business, its risk factors, the management discussion and analysis (MD&A) and the company's financial statements, together with the accompanying notes, from such company's disclosure documents into Japanese.

Under the amended English-language Disclosure Rules, it is no longer necessary to translate the MD&A and financial statements, together with the accompanying notes, into Japanese. Companies are only required to provide Japanese translations of the summaries of the business description, risk factors and certain selected financial data from the company's disclosure documents. Apart from the aforementioned summaries, a company may otherwise satisfy the submission of the FIEA documents by providing a copy of its disclosure documents as submitted in its home jurisdiction in English together with certain supplementary documents including certain information defined under the FIEA not otherwise included in the disclosure documents of foreign jurisdictions, and a table, in Japanese, setting forth the specific requirement under Japanese law and where such information is disclosed in the submitted English documentation. With respect to a Securities Registration Statement filing, information about the offered securities must be prepared in Japanese in addition to preparation of these documents.

To take advantage of the amended English-language Disclosure Rules, foreign companies must obtain the prior consent of the Japanese Financial Services Agency (JFSA). Generally, the Rules are available to those foreign companies that are required, pursuant to the applicable laws, regulations and rules of their home jurisdiction or stock exchange, to make disclosures in English equivalent to those required under the FIEA, and determined by the JFSA to be satisfactory. Documents disclosed by a company to regulators on a voluntary basis cannot be submitted to the JFSA in satisfaction of Japanese regulations under the Rules. For example, the JFSA has in the past approved as satisfactory under the Rules documents submitted to the US Securities and Exchange Commission and, therefore, copies of documents such as the Form 10-K, 10-Q and DEF 14A (the definitive proxy statement) may be used as FIEA documents.

Before the amendments came into force, foreign companies rarely took advantage of the exemptions offered by the English-language Disclosure Rules. There are many potential reasons as to why.

The first was the unavailability of English-language disclosure for the primary disclosure documents, namely the Securities Registration Statement, meaning foreign companies were required to make extensive disclosures in Japanese even if they had filed the annual securities report under the Rules (further, filing the annual securities report in Japanese would allow such information to be incorporated by reference into the Statement). The second was a lack of guidance concerning what information must be translated into Japanese (the content of respective summaries). This meant (together with the fact that only the summary of a company's MD&A section and financial statements, and its notes, were to be translated) it was felt that using such English disclosure under the Rules could result in the foreign company being subject to unforeseen liabilities.

The amended English-language Disclosure Rules resolve these issues. Further, the Tokyo Stock Exchange and the Japan Securities Dealers Association have published JFSA-cited practical guidance concerning the preparation of the English-language disclosure pursuant to the Rules.

Remaining issues

As of August 22 2012, only five foreign companies, out of the 137 foreign issuers active in Japan, had filed an ASR using English-language disclosure under the amended Rules. This might be because there was not enough time to prepare the necessary documentation to submit under the amended Rules, since the relevant cabinet office ordinance was promulgated on February 15 2012. With respect to the filings of semi-annual reports, most companies have not yet filed any this year and, therefore, it remains to be seen whether foreign issuers in Japan will use the Rules in making such filing.

Another factor that might also be preventing foreign companies from using the amended English-language disclosure Rules is that there is no established practice with respect to conducting primary offerings under the Rules and there seems to be no consensus among Japanese securities companies as to the level of Japanese disclosure required. It is perhaps for this reason that foreign companies wishing to make a public offering of securities remain hesitant to use the Rules.

Kai Hoshino

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