An act amending Japan's Financial Instruments and Exchange Law (FIEL) was passed in May 2011. The amended FIEL, which is scheduled to become effective by May 24 2012, will include revisions to, among other things, the disclosure systems for rights offerings.
There has been criticism that extensive capital increases through third-party allotments or public offerings have led to dilution of existing shareholders' rights or short selling by hedge funds, which negatively impact the capital markets in Japan.
In European and other Asian markets, rights offerings are typically undertaken as a means to increase capital, as corporate law in these countries, under which pre-emptive rights are generally granted to shareholders, differs from the Company Law of Japan which permits a public company to select allottees in the event of an issuance of its shares.
Under these circumstances, it has been argued that rights offering using allocation of SARs (shinkabu yoyakuken musho wariate) may be an efficient way of raising capital in Japan as well. As of the date of this article, however, rights offerings have been conducted in Japan only once due to various practical problems, some of which were addressed by a series of revisions to the relevant regulatory systems starting in 2009. In the context of these arguments, one of the goals of the amendments to the FIEL is to improve the legal systems for rights offerings.
Flexibility of method of delivery of prospectus
Under the FIEL, an allocation of SARs is classified as a solicitation of securities. A Securities Registration Statement must be filed before commencement of a solicitation of listed securities. Furthermore, the FIEL prohibits acquisition of the securities by investors until, following the seven- to 15-day waiting period, the Securities Registration Statement becomes effective. In addition, a prospectus must be prepared and delivered to investors on or before their acquisitions.
In relation to these regulations, when an allocation of SARs is conducted, a Securities Registration Statement must be filed in advance of public notice of the record date for the allocation of SARs and the Statement must be effective before the effective date of the allocation of stock acquisition rights. In an allocation of SARs, however, stock acquisition rights have traditionally been considered to be allocated on the date on which the allotment notice from the issuer is required to be given to shareholders as of the record date two weeks before the first date of the exercise period of the stock acquisition rights to be granted. As a result, it is necessary to deliver the prospectus to relevant shareholders before the date of such allotment notice.
The obligation to deliver a prospectus to all shareholders, however, may place an excessive burden on listed companies, which often have a great number of shareholders. It has been pointed out that it may be less necessary to deliver a prospectus in relation to an allocation of SARs, in which all shareholders, who are expected to be familiar with the issuer, have an opportunity to acquire such stock acquisition rights and exercise them, than in a public offering, in which investors may not have sufficient information about the issuer, and it is possible that they may not to be able to purchase as many offered securities as they want.
In order to address these issues, the amended FIEL exempts issuers from prospectus obligations if (i) stock acquisition rights to be allocated are listed, or expected to be listed without delay after issuance, on a financial instruments exchange in Japan; and (ii) a Securities Registration Statement is filed, and the filing of the Statement and the other matters prescribed by law and relevant regulations are disclosed in a newspaper.
Other related revisions
The amended FIEL includes in the definition of "underwriting of securities" a commitment by underwriters that, if not all stock acquisition rights to be allocated in a rights offering are exercised, the underwriters will acquire all such remaining rights from the issuer, exercise all of the stock acquisition rights and dispose in the market all of the shares acquired upon such exercise.
As a result, while the minimum capitalisation requirements and other requirements, for instance the obligation to provide adequate examination of the financial situation of the issuer, will be imposed on underwriters making such commitment, the takeover-bid regulations will not be applicable to acquisitions of stock acquisition rights by such underwriters. Such acquisitions are now considered in the calculation of shareholding ratios under the take-over-bid regulations, which makes it more difficult to conduct rights offerings.
In addition, the amended FIEL expands the scope of "material fact" under insider trading regulations to include allocation of SARs.
Although the amended FIEL may lead to more rights offerings in Japan, there are still practical obstacles to increasing the number of rights offerings from the perspective of the legal infrastructure. In particular, the requirement for two weeks' prior allotment notice under the Company Law prevents shortening of the offering period, and it is essential to amend the Company Law to resolve this issue. Amendments to the Company Law are not, however, undertaken very often. Given that, it is expected that there will be continued improvement of diversified financing methods for listed companies.