In December 2009, the Tokyo Stock Exchange (TSE) announced an amendment to its rules regarding stock acquisition rights (SARs) abolishing the requirement under the Implementation Rules for the TSE Listing Standard that one share must be issued when a listed stock acquisition right is exercised. This amendment, which effectuates a part of the Listing System Improvement Action Plan 2009 published by the TSE, is intended to promote the use of rights issues as an alternative to public offerings of shares.
It has been reported that in 2009 approximately ¥5 trillion yen ($55.6 billion) was raised through public offerings of newly-issued common shares in Japan. According to the media, as a result shareholding ratios of existing shareholders, as well as the financial value of shares (including EPS) were often significantly diluted. This could be avoided or mitigated if capital is instead raised through a proportional allotment to all existing shareholders, specifically a "shareholder allotment of stock acquisition rights without consideration," which is provided for in Article 277 of the Companies Act.
In a rights issue like this, existing shareholders may choose to either (i) exercise SARs to purchase shares, maintaining their respective shareholding ratios, or (ii) sell their SARs through a stock exchange, receiving compensation for dilution. Alternatively, such shareholders may quickly sell out the existing shares prior to the allotment of SARs (the fall in market price), or wait for the issuer to repurchase such SARs for value (per exercise of call options retained by the issuer). Although rights issues are more shareholder-friendly than public offerings, few companies in Japan have sought to raise capital through them. One reason is the "one share per SAR" requirement imposed by the above listing rules.
Prior to the amendment, a listed company intending to raise funds through a rights issue would effectively be required to double the number of its outstanding shares. This was a critical obstacle since, under the Companies Act, a company's outstanding shares (including shares offered in an allotment) cannot exceed the number authorised by its articles of incorporation. The TSE's amendment now allows listed companies to issue SARs corresponding to a fractional number of shares (for instance, a one-tenth (0.1) share per SAR) and accordingly one share would be issued only upon the exercise of the aggregated number of SARs. Rights issues would no longer necessarily result in significant increases in outstanding shares. Recently, the Jasdaq Securities Exchange and Osaka Securities Exchange adopted similar amendments to their listing rules.
Another factor that dissuades Japanese listed firms is the lengthy waiting period required by the Financial Instruments and Exchange Act (FIEA) and the Companies Act. In a shareholder allotment, including a rights issue, the FIEA requires the submission of a registration statement at least 25 days (or the submission of a shelf registration statement, if the issuer is eligible, at least 18 days) prior to the record date for determining shareholders eligible to receive SARs. Also, under the Companies Act, an official publication should be made 14 days prior to the record date, and a further two weeks must elapse after the delivery of notice to record shareholders, before any SAR can be exercised.
The lengthy waiting period is a concern to listed companies because the FIEA regulations require that certain events occurring during the waiting period, which should be disclosed from the viewpoint of investor protection, must be promptly reported to all offerees with an amended prospectus. Compliance could result in administrative and financial burdens, especially for companies with many shareholders. A shortened waiting period would reduce the risk of such burdens (and also the risks associated with market price fluctuations during the waiting period), encouraging rights issues.
It should be still noted, however, that apart from the waiting period issue, for companies with many shareholders the administrative burdens associated with the delivery of shareholder notice under the Companies Act are also significant. And there is another concern that, under the current system, securities firms may not process the requests to exercise SARs by those shareholders, presumably to be made all at once, in a timely manner.
Japan's Financial Services Agency is contemplating amending FIEA regulations to shorten the waiting period applicable to shareholder allotments. Although it is not clear whether this will result in an immediate increase in the number of rights issues, as market infrastructure to facilitate rights issues develops, it may become an important alternative to public offerings, just as it has become in the European and other Asian markets.
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