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New share certificate system; Emissions trading

New share certificate system

On January 5 2009, the electronic share certificate system under the Law on Book-Entry Transfer of Corporate Bonds, Stock and Other Securities (shasai-kabushiki-tou-no-furikae-ni-kansuru-horitsu) will be implemented. Upon implementation, all shareholders’ rights in listed companies will be recorded and managed electronically in transfer account books (furikae-kouzabo) maintained by record-keeping organisations (kouza-kanri-kikan) such as banks and securities companies. Under the present system, shareholders hold paper share certificates and transactions are conducted by physically transferring the paper share certificates. In accordance with the Act on Custody and Transfer of Share Certificates (kabuken-tou-no-hokan-oyobi-furikae-ni-kansuru-horitsu), shareholders of listed companies also have the option of depositing paper share certificates of those listed companies with the Japan Securities Depository Center, (JASDEC) (hofuri), a public custody organisation in Japan. However, with the implementation of the new system, paper share certificates will no longer be used and all accounts will be maintained electronically. The introduction of the electronic share certificate system should be beneficial to both shareholders and listed companies.

Benefits for shareholders

Implementation of the electronic share certificate system will benefit shareholders of listed companies in the following ways. First, the possession and transfer of shares will become safer and more efficient: under the new system there is no risk of loss or theft of the paper share certificates because the physical transfer of paper certificates is unnecessary for transactions. In addition, the number of ways shareholders can receive dividends will increase and will include more convenient options. Under the present system, shareholders have only two options for receiving dividends: they can either obtain their dividends in cash at a bank or via direct deposit. For direct deposits, the shareholder is required to notify each company of that shareholder’s account information. Under the new system, a shareholder need only designate a bank account and inform JASDEC of the account information for the designated bank account, then the dividends from all companies are directly deposited into that account. Also, record-keeping organisations can receive dividends on behalf of shareholders who hold trading accounts with those organisations, which was not possible before. This enables shareholders to monitor their profits and losses by examining their purchases and sales, as well as dividend entries in their account.

Benefits for listed companies

Listed companies will also benefit, as they will be able to more frequently update their list of shareholders and data regarding the quantity of shares owned by each particular shareholder. For example, under the present system, JASDEC provides companies with an updated list of shareholders only on record dates. Therefore, listed companies become aware of changes in the composition of their shareholding only on the record dates, which are set forth in the company’s articles of incorporation and typically occur on the last day of an accounting term. Thus, under the present system, listed companies have no way of discovering changes in the composition of their shareholding except on such dates. Listed companies can discover the changes only when a large shareholding report is submitted to the Ministry of Finance Local Finance Bureau as required by the Financial Instruments and Exchange Law. Under the new system, however, listed companies can request updated information from JASDEC on the composition of their shareholding (so-kabunushi-tsuchi) but, in order to receive such information, it is required that there be justifiable grounds such as meeting conditions set forth in the articles of incorporation. Therefore, companies can receive information on the composition of their shareholding not only on the record dates but also upon request. In addition, companies can also request that JASDEC provides information regarding a specific shareholder when justifiable grounds exist. In these ways, listed companies can assess the composition of their shareholders on a more timely basis, and it may be possible to use such information to prepare defensive measures against attempted takeovers or to estimate the number of affirmative votes likely to be available at a shareholders’ meeting at an earlier stage.

With the implementation of the new system, the share certificate system in Japan will undergo significant changes and, as described above, it will be beneficial for both listed companies and their shareholders.

Akira Matsuda and Akihiro Ishikawa

Emissions trading

April 2008 marked the start of the commitment period under the Kyoto Protocol for Annex I countries to achieve reductions in their greenhouse gas emissions. Japan is committed to reduce its total greenhouse gas emissions by 6% compared to 1990 levels within the next five years. The G8 Hokkaido Toyako Summit of July 2008 focused on climate change as a main agenda item by bringing discussion of this issue and the impending task to the forefront. As one of the measures to help Japan achieve its target under the Kyoto Protocol, the government has been actively preparing legislation to implement emissions trading.

Emissions trading refers to the trading of carbon credits, which are units of greenhouse gas emissions that can be traded between countries in order to meet their target reductions. Under the Protocol, certified emission reductions (CERs) are one type of unit issued to a company that reduces its emissions by carrying out greenhouse gas emissions reduction or removal projects, which are referred to as Clean Development Mechanism (CDM) projects. CDM is a mechanism for developed countries to earn CERs by investing in CDM projects in developing countries, which they may apply towards meeting mandatory limits on their own emissions. Trading CERs provides flexibility for both countries and companies as emitters of greenhouse gases to fulfill their obligations.

In December 2008, an amendment to the Financial Instruments and Exchange Law (FIEL) is expected to come into effect, and it allows banks and insurance companies to trade carbon credits. Therefore, financial institutions such as banks, insurance companies and securities companies will be able to participate in emissions trading and emissions trading may be conducted in a way similar to financial instruments trading. However, a regulatory system for emissions trading has not yet been completely put in place. For instance, unlike the regulations on participants in financial instruments trading, participants in emissions trading are not required to obtain a licence in order to purchase, sell or solicit the purchase of carbon credits, nor are they required to make tightened disclosures regarding emissions trading to customers.

On the other hand, if emissions trading is conducted by means of a trust scheme, as has been the case up to this point, regulatory requirements come into play. Trust beneficiary rights may also be traded under the FIEL, however, the FIEL regulates such trading and participants must be licensed and tightened disclosure requirements apply. A big company such as an electronics, manufacturing or trading company that conducts a CDM project and acquires carbon credits, transfers its credits to a trust bank or a trustee and will hold trust beneficiary rights in the credits. The trust beneficiary rights are divided into small lots and these are then traded.

Allowing trust beneficiary interests to be traded has enabled smaller companies and companies in other industries to participate in CDM projects and has thereby facilitated investment in reducing greenhouse gas emissions. It is thought that the recent amendment to the FIEL that allows banks and insurance companies to trade credits will also have similar effects on overall investment. Eventually, all emissions trading will be regulated in the same way as financial instruments trading and will be conducted through an exchange market. Although the legal system for emissions trading is still taking shape, recent activity seems to show the government's commitment to meeting its goal and its expectation that this goal will only be reached by greater involvement.

Yoshiyuki Tanaka

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