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TSE listings

In July 2008, the Tokyo Stock Exchange (TSE) will revise its listing rules with regard to the listing system for shares without voting rights (non-voting stock) and will also publish guidelines for such changes. Overall the changes are intended to allow more companies to list non-voting stock and to protect non-voting shareholders of such listed companies.

A company's ability to issue classified stock is highly useful for raising capital. Under the current TSE system, however, listing rules and regulations have not been oriented toward non-voting stock and companies have not been able to make full use of non-voting stock.

By allowing listing, the revisions are intended to create opportunities for companies and for investors. However, the TSE is concerned that if the number of non-voting shareholders dramatically increases the interests of the non-voting shareholders may not be sufficiently protected.

In particular, the TSE is concerned that in some cases there may be concentrated or limited shareholding of the voting stock while at the same time a much greater number of non-voting shareholders. In such cases, a small minority of shareholders could possibly control a company. In order to reduce the likelihood of such abuses the TSE has decided to revise its listing rules and regulations.

The following new requirements for listing are meant to protect the interests of non-voting shareholders. The new regulations require a company that has chosen a dual voting/non-voting stock scheme to set aside its non-voting stock scheme in cases where it is possible for a minority of shareholders to control the company.

One way a company could comply with this requirement would be through the adoption of a sunset provision; non-voting stock would be converted to common stock in cases where a certain period has passed from the foundation of the company or based on other pre-determined conditions.

Another option would be a breakthrough provision whereby non-voting stock would be converted to common stock in cases where someone has acquired a large portion of the voting rights of the company by takeover bid or through other types of acquisitions.

The new regulations also require that the interests of non-voting shareholders be protected in situations where there is a conflict of interest between voting shareholders and non-voting shareholders, or between a majority shareholder and the company. In addition to allowing the listing of non-voting stock, the revisions will allow a company which issues two types of voting right stock, major and minor, to newly list only its minor voting right stock on the TSE. As the TSE has similar concerns about the protection of these minor voting right stock shareholders' interests, such companies must provide for the conversion of non-voting stock to common stock in cases where a majority shareholder transfers its common stock and the result is a change in control of such company.

The new regulations will also state that a company will not be able to list preferred stock without voting rights unless the company is capable of distributing preferred dividends. There are also other requirements, such as the requirement that non-voting stock be converted to common stock if dividends have not been distributed consecutively for a certain period. Further guidelines will be published to expand on these changes to the requirements and regulations.

The new revisions to the TSE's listing rules should broaden the shareholding base of corporations. It is hoped that they will also protect the interests of these new shareholders.

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