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Japan

Under the amended Commercial Code of Japan, which took effect on April 1 2002, the provisions relating to convertible bonds were replaced by rules relating to bonds with stock acquisition rights. The purpose of the amendment is to treat the option element of the convertible bond in a similar fashion to a bare stock acquisition right. The aim of the amendment was not to change the substance of the law on convertible bonds.

On the exercise of the stock acquisition right attached to a bond, in lieu of the full redemption of the bond to the bondholder, the issuer will treat the redemption of the bond as payment for the stock acquired under the exercised right. The deemed price to be paid by the bondholder on exercise of the stock acquisition right will be equal to the issue price of the bond. The issuer may then issue new stock or transfer its treasury stock to the appropriate bondholders.

The amended Commercial Code, however, seems to require a separate valuation to assess the fair value of the stock acquisition rights attached to the bonds in order to determine whether the terms of the stock acquisition rights are especially favourable. Where the terms are especially favourable, the Commercial Code requires a special resolution of the stockholders, as well as a board resolution, authorizing the issuance. Policymakers expect that certain model analysis, such as the Black-Scholes pricing model, will be used to determine this separate valuation. However, in the case of bonds with stock acquisition rights, valuation of the detached right is impractical and inconsistent with the practice of pricing convertible bonds. Since there is no further established guidance on this matter, it is not clear whether the book building pricing process in connection with an offering of bonds with stock acquisition rights is appropriate for this separate valuation purpose. Other ancillary issues have to be addressed. For example, bonds with stock acquisition rights will be issued in bearer form and this may cause problems in relation to US tax treatment when these securities are placed or offered in the US.

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