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TSE listings revised

On October 17 2007, the Tokyo Stock Exchange (TSE) announced a partial revision of its listing rules and regulations corresponding to the items in the TSE's Comprehensive Improvement Program for the Listing System 2007, published on April 24 2007. The aim of the programme was to facilitate the operation of the secondary market, protect shareholders and investors, and help listed companies improve corporate value and international competitiveness.

The revisions introduce a code of conduct for companies. Previously, the TSE regulations focused on timely disclosure, and did not intervene heavily in the business activities of listed companies; but recent changes in the business environment call for the establishment of norms of corporate behaviour in the marketplace. The revised TSE regulations expressly state that listed companies must respect the function of the secondary market and the rights of shareholders and investors. Under the revised regulations, when listed companies offer moving strike convertible bonds (MSCBs), they are to consider the effects that the MSCBs have on the secondary market, and on the rights of shareholders. They must take appropriate measures to control the conversion of MSCBs by buyers. To strengthen the corporate governance of listed companies, the TSE now requires that all issuers of domestically listed stock let shareholders exercise their voting rights in writing, in the same way as required for listed companies with more than 1,000 shareholders under the Companies Act. They must have a board of directors, board of company auditors or committees, and an accounting auditor. They must also set up a system to ensure the appropriateness of operations; under the Companies Act, this is known as an internal control system. The presence of boards and committees and an internal control system, is already required for large companies – companies with more than ¥500 million ($4.6 million) in stated capital or more than ¥20 billion in liabilities. To ensure the effectiveness of the revisions, the TSE has implemented enforcement measures, issuing warnings or public announcements for those companies that fail to comply. In addition, the TSE has introduced a special cautionary market section for listed companies that need to improve their internal systems, but for which delisting would be unjustifiably harsh. The creation of this section enables the TSE to continue to monitor those companies closely.

The revised regulations also deal with the treatment of class shares. Recent amendments to the Companies Act make issuing class shares more flexible. But critics have said that shareholders may be unfairly affected if anti-takeover methods are instigated using class shares. To address this concern, "an unreasonable restraint on the rights of shareholders" that can lead to delisting now includes so-called voting restriction plans (restrictions on the voting rights attached to listed shares) and multiple voting share plans (the issuance of classified shares with more voting rights than those attached to listed shares).

It is hoped that some of the revisions will enhance confidence in the Mothers Index. To promote the listing of companies with high growth potential, the TSE will not apply its delisting criteria for shortfalls in sales revenue (more than ¥100 million per year) to Mothers listed companies for a period of five years from the date of listing. Also, to clarify the Mothers Index's role as a first step market for developing venture companies, the rules regarding reassignment of listed companies from the main market to the Mothers Index have been abolished. Lastly, the revisions simplify and rearrange the listing examination criteria and liquidity delisting criteria. Previously, the criteria were complicated and uncertain, at times raising fears among listed companies that they might be delisted unexpectedly.

The revisions are the first step in the programme's implementation. The next stage of revisions will follow a consideration of the appropriate practical approaches regarding the secondary items to be introduced. Because the items are considered and imposed on a continuous basis, the precise schedule of implementation is uncertain.

Hiroki Aoki and Motoki Saito

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