Dematerialized shares are shares for which no certificates may be issued. Now Japanese joint-stock companies are generally required to issue share certificates. Many public companies' share certificates are deposited at the Japan Securities Depository Center, Incorporated (JASDEC), the central securities depository providing both depository and book-entry settlement services for marketable securities. For share certificates that have been deposited at JASDEC, no physical delivery of them is required in order to effect a transfer of shares. In September 2003, the Legislative Council of the Ministry of Justice published an outline for a new law, expected to be passed in 2003 or 2004, which will eliminate the issuance and use of share certificates of public companies and certain non-public companies.
According to the outline, the new law will provide that the articles of incorporation of all public companies will be deemed to prohibit the issuance of share certificates from the date, which will be within five years of the new law's effective date, that will be determined by cabinet order. From this date, all share certificates of public companies will be null and void.
Under the new law, public companies will be deemed to adopt a new book-entry system, which is expected to be maintained by JASDEC. Under this system, any transfer of shares will be notified to the relevant transfer institution, which will debit and credit shares from and to the relevant investors' securities accounts. The person of record of a securities account will be considered the valid owner of the relevant shares. Transfers of shares will only be effective when recorded in the transferee's securities account. Unlike the current system, these book-entries will not be based on the existence of physical certificates.
According to the outline, the new law will provide that non-public companies may amend their articles of incorporation to prohibit the issuance of share certificates. If such company chooses to prohibit share certificates, then all existing share certificates of the company will be null and void and transfers of shares will be effected between a transferor and transferee upon agreement, but will not be perfected against the company or any other third parties until recorded on the company's shareholders' registry. If the company also adopts the new book-entry system, any transfers of its shares will only be effective when seconded in the transferee's securities account.