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Electronic share certificates

The electronic share certificate system in Japan will be implemented on January 5 2009 (the actual date will be confirmed by a Cabinet Office Ordinance) under the Law on Book-entry Transfer of Corporate Bonds, Stocks and Other Securities (shasai-kabushiki-tou-no-furikae-ni-kansuru-horitsu). Upon implementation, shareholders' rights in all listed companies will be recorded and managed electronically in transfer account books (furikae-kouzabo) by record-keeping organisations (kouza-kanri-kikan) such as banks and securities companies. Also, all trades and other transactions involving shares will be conducted through trading accounts opened in the name of individual shareholders.

Assigning shares or creating a pledge on shares requires the physical delivery of paper certificates. As part of this new system, all existing shares representing shares in the listed companies will become invalid and will no longer have legal significance. The attribution of rights in shares of stock will be determined solely from entries recorded in the transfer account books. When assigning or pledging shares, a notice of the assignment or pledge to the record-keeping organisation will be sent, which the institution must promptly record. The electronic share certificate system virtually eliminates the risk to shareholders of loss or theft of their PAA share certificates. The system should also eliminate the risk to purchasers of unknowingly receiving stolen or counterfeit certificates. The management of shares and transactions involving shares of listed companies will be safer and more efficient under the new system.

But there are some concerns for shareholders during the transition to the new system. Under the current system, PAA shares may be deposited with the Japan Securities Depository Centre (JASDEC) (hofuri) which is a public custody organisation under the Act on Custody and Transfer of Share Certificates (kabuken-tou-no-hokan-oyobi-furikae-ni-kansuru-horitsu). Exchange transactions of listed shares that have been deposited are settled by book-entry transfer through JASDEC. Those shareholders holding JASDEC deposited shares will already have opened trading accounts with JASDEC. Such shareholders will not need to perform any additional procedures during the transition. However, for shareholders who have not deposited their shares with JASDEC, their rights will be protected in special accounts (tokubetsu-koza) with a record keeping organisation, automatically created by the issuer of the shares, based on the issuer's list of shareholders. If non-JASDEC shareholders' ownership records on the issuer's list are inaccurate, the issuer might not treat them as the correct owners of the shares and their rights might not be reflected in the special account. Moreover, if the nominal shareholder (the most recent registered holder in such a case) named in the list of shareholders from the implementation date sells the shares, even without the actual shareholder's approval, and the transferee believes that the seller is the actual shareholder, the transferee will obtain perfected rights to the shares. Therefore, it is important for shareholders that might be affected to contact the transfer agent (kabushiki-meibo-kanrinin) to confirm that their ownership is properly registered before the implementation date. Some shareholders may be able simply to confirm proper registration of the shares by checking to see if their names appear correctly in the Shareholder's Name column on the reverse side of the paper certificates. However, on PAA shares issued after the enforcement date of the Companies Act (kaisha-ho), May 1 2006, the shareholder's name does not appear, as the Companies Act eliminated the requirement for issuers to record shareholders' names on their certificates. Therefore, an inquiry to the transfer agent will be needed in such cases.

Furthermore, for a non-JASDEC shareholder, even if the actual shareholders' names appear on the list of shareholders and their rights are correctly recorded, a transaction involving their shares cannot be executed if the rights to the shares remain in the special account created for the transition as previously mentioned. To sell such shares, opening a new trading account with a record-keeping organisation and then transferring the shares to that account would be required. In contrast, if a shareholder's shares have been deposited with JASDEC, the rights to the shares will automatically be transferred to the trading account of the shareholder on the implementation date, and transactions involving such shares can be executed without opening another account. Since all listed companies' shares can be treated under the JASDEC system, deposit of a shareholder's shares with JASDEC before the implementation date will make the transition smoother.

With the implementation of the new electronic share system, it is important for shareholders to follow these developments to ensure their ownership rights remain in tact and to allow full use of those rights.

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