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Ippan Shadanhojin entities; New share certificate system

Ippan Shadanhojin entities

In Japanese structured finance transactions, limited liability chukan hojin (yugen-sekinin-chukanhojin) have been used as parent companies holding the voting interests of special purpose vehicles (SPVs), the latter holding the assets underlying the transactions: that is, they function as Cayman charitable trusts for Cayman SPVs. On December 1 2008, the Shadanhojin Act (Ippan Shadanhojin-Ippan Zaidanhojin Hou) will take effect, and the law governing the chukan hojin will be repealed. Accordingly, existing limited liability chukan hojin will automatically turn into ippan shadanhojin.

Upon the Shadanhojin Act taking effect, an existing chukan hojin must follow three procedural requirements: changing the name of the entity, changing its commercial registration and changing its articles of incorporation. First, an ippan shadanhojin must use in its name the words ippan shadanhojin. Changing the entity's name is required before the end of the first general meeting of members held in the entity's next business year (the entity does not have to change its name immediately). As a result of the name change, an ippan shadanhojin will need to amend its articles of incorporation and revise its commercial registration. If an existing entity fails to change its name or properly update its commercial registration by the above deadline, administrative fines will be imposed. In addition to these procedural requirements, it is necessary to review the entity's contracts and other documents so that such changes of the name, its articles of incorporation and its commercial registration may not result in a violation or breach of the provisions of the contracts or documents.

When establishing a new ippan shadanhojin, investors or users may realise some cost savings because of several differences between it and the limited liability chukan hojin: (i) the Shadanhojin Act abolishes the restriction on contribution of initial capital when establishing an ippan shadanhojin (a minimum contribution of ¥3 million (approximately $30,000) is required for incorporation of a limited liability chukan hojin); (ii) specific details relating to initial capital are no longer required to be set forth in the articles of incorporation and commercial registration; (iii) appointing an auditor-secretary (kanji) has become optional for an ippan shadanhojin where it is compulsory for a limited liability chukan hojin; and (iv) two or more members are required for a limited liability chukan hojin for its continuation, whereas an ippan shadanhojin may continue to exist even if there is only one member. However, such investors or users should know that public notice of an account settlement is required under the Shadanhojin Act which is not required for a limited liability chukan hojin.

As noted above, the ippan shadanhojin can be used in the same manner as a limited liability chukan hojin, because the basic characteristics of the ippan shadanhojin are much the same as that of the limited liability chukan hojin. However, as a result of the changes referred to above, it should be easier to reduce costs when using an ippan shadanhojin.

Akira Matsuda and Akihiro Ishikawa

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

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