Consistent with its plan to mold the Japanese Commercial Code to the needs of business, the Japanese government recently announced amendments to the laws on stock rights. From April 1 2002 two types of stock rights – detachable stock warrants and stock options – will be replaced by a new type of stock right: shinkabu-yoyakuken (abbreviated to yoyakuken), meaning literally "the reserved right to new shares".
Under the present law, detachable stock warrants must be issued with a certificate and accompanied by an issue of bonds, but they may be issued to anyone and are transferable without the bonds. Stock options, on the other hand, may only be issued to directors and employees – usually as part of an incentive plan. Stock options are not issued with a certificate and are non-transferable. Further, the right to have shares issued under a stock option must be exercised within 10 years from the date of the special resolution authorizing the stock option. Even more restrictive is the rule that the number of shares to be issued under all stock options, including the number of unissued shares from previous stock options, must not exceed 10% of the aggregate issued shares.
In contrast, yoyakuken – defined as the right to make a company issue new shares or transfer shares held by the company to the yoyakuken holder – may be issued to anyone in any number without an accompanying bond and there is no legislated time limit on exercising the share issue right. However, a company must issue certificates representing yoyakuken without delay or upon request of the yoyakuken holder.
Thus, diligent corporate governance is required. Indiscriminate issue of yoyakuken could result in control of entities falling to unintended parties. Used properly, however, the potential for yoyakuken is huge. New and better tailored financial products will become possible by combining yoyakuken with bonds and various other securities. Companies can offer yoyakuken not only to its own directors and employees but also to related company directors, employees, transaction parties and investors as incentive for favourable treatment. Yoyakuken can also be used to appropriately alter the control of entities at future dates – a useful tool for joint venture parties or in defending a hostile takeover bid.
Given these benefits, yoyakuken may soon become a prominent security in the Japanese market place.