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Government control of Tepco

On March 29 2012, the Tokyo Electric Power Company applied to amend Japan's financial support requirements due to the significant amount of compensation estimated to be issued pursuant to the series of accidents at Tepco's Fukushima Daiichi Nuclear Power Station.

Shu Sasaki

On March 29 2012, the Tokyo Electric Power Company (Tepco) applied under the Act to Establish Nuclear Damage Compensation Facilitation Corporation to the Nuclear Damage Compensation Facilitation Corporation, a Japanese public organisation established to function as a support organisation facilitating the issuance of compensation for damages and other costs that would arise in the event of a nuclear power-related accident occurring, to amend the financial support requirements under the Act due to the significant amount of compensation estimated to be issued pursuant to the series of accidents at Tepco's Fukushima Daiichi Nuclear Power Station. This is estimated to stand at approximately ¥2.5 trillion (approximately $31.8 billion). The following month, Tepco applied to the responsible ministers (at the Office of the Nuclear Damage Compensation Facilitation Corporation in the Cabinet Office and the Agency for Natural Resources and Energy at the Ministry of Economy, Trade and Industry) for their approval of an amendment to the Special Business Plan pursuant to the Act. The amended Special Business Plan sets out certain business strategies, including the streamlining of management, improving Tepco finances to stabilise its Fukushima Daiichi Nuclear Power Station and methods to secure a stable power supply. The amended Plan was approved on May 9 2012.

The Plan's strategies to improve Tepco finances are as follows: (i) obtain the cooperation of financial institutions, including obtaining new financing, such as a credit line for short-term loans in the amount of approximately ¥1 trillion; (ii) raise approximately ¥1 trillion by way of a third-party allotment of shares in the capital of Tepco to the Corporation; (iii) obtain Tepco shareholder cooperation, including consent to the proposed share issuance and continued non-payment of dividends; and, (iv) revise Tepco's business performance objectives.

The Corporation will subscribe for two classes of Tepco shares (collectively, the Class Shares) in a ratio yet to be determined and at an approximate subscription price of ¥1 trillion in total. In Japan, a stock company, in principle, may determine at its option whether or not certain classes of shares will have voting rights attached to them, although the precise attributes of the Class Shares has not yet been disclosed it appears that the Plan contemplates the issuances of one class of shares with voting rights attached and one class of non-voting shares. In addition, although the specific share attributes have not yet been confirmed, it is believed that the Class Shares with voting rights attached will be convertible into non-voting Class Shares and the non-voting Class Shares will be convertible into common shares.

Following this share issuance, the Corporation is expected to hold over 50% of the voting rights of Tepco and, furthermore, the conversion of the non-voting Class Shares into common shares is expected to result in the Corporation holding over two-thirds of the voting rights of Tepco.

The Plan contemplates that Tepco will ultimately reduce the level of government control by way of repurchase of the Class Shares. In Japan, the tender offer regulations under the Financial Instruments and Exchange Act do not apply to transactions involving the repurchase by a listed company of its unlisted shares, and as such the tender offer regulations would not apply to the repurchase of the Class Shares by Tepco. In order to complete such repurchase, however, Tepco not only requires sufficient funds, but it must also continue to meet certain capital requirements under the Companies Act. Although Tepco intends to increase its capital by streamlining management and strategic business development, should it fail to do so it may be unable to repurchase the Class Shares from the Corporation.

If the Class Shares are converted into Tepco common shares, the Corporation will continue to hold a majority of the voting rights of Tepco. In addition, the tender offer regulations may apply to an off-market transaction involving either Tepco repurchasing its common shares or the Corporation selling its common shares in the capital of Tepco to a specific person because the Tepco common shares are listed on the Tokyo Stock Exchange, the Osaka Securities Exchange and the Nagoya Stock Exchange. Furthermore, in practice, the number of the Tepco shares to be held by the Corporation may be too many to sell on the market without severe dilution and depreciation in value occurring and it is for this reason that many believe that it may be difficult for Tepco to discontinue being under governmental control once this Plan is enacted.

Shu Sasaki

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