PLC - Japan moves to facilitate rights offerings

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Japan moves to facilitate rights offerings
Resource type: Legal update: archive
Status: Published on 28-Feb-2011
Jurisdiction: Japan

This article is part of the PLC Global Finance February 2011 e-mail update for Japan.
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The Financial Services Agency of Japan (the FSA) published a report by its study group regarding
how to improve rules for rights offerings. This article looks at the FSA's proposed improvements tocurrent rules for rights offerings.

On 19 January 2011, the Financial Services Agency of Japan (the FSA) published a report by its
study group regarding how to improve rules for rights offerings.
In Japan, it has been quite usual for companies in need of new equity to offer new shares in themarket or to allocate the new shares to persons other than existing shareholders, but without
providing existing shareholders with pre-emptive rights. Such share issuance can be madepursuant to a board resolution and without a shareholders' resolution, unless the company is a
closed company or the issue price of new shares is particularly favourable to subscribers. Suchshare issue practice has recently been questioned (though not prohibited) from the viewpoint ofdilution of existing shareholders' rights; this dilution issue may be one of the factors that has lead toa decline in investment in Japanese stock markets. Rights offerings are expected to overcome thisproblem (pursuant to which, share options are allocated to existing shareholders without
consideration for the options themselves and such share options are listed so that the existing
shareholders may either exercise the options by subscribing for new shares, or sell the options inthe market).
The FSA report addresses issues under current rules for rights offering and proposes certain
improvements (though a timetable for the rule amendments is yet to be determined) as follows:
Change of method in providing prospectus to existing shareholders. As a general rule,
under the Financial Instruments and Exchange Act of Japan (the FIEA), listed companies may
allocate share options without consideration only by means of public offering which would
require a prospectus to be directly provided to each investor. This process might be quite
onerous for rights offerings where there are numerous existing shareholders (while the existing
shareholders, who will automatically be allocated with share options, need information in theprospectus only in relation to making a decision as to whether to exercise or sell the options);
the FSA report proposes to change the rule so that publishing the prospectus on EDINET will
constitute sufficient disclosure.
Appropriate regulations for "undertaking" type rights offerings. When an issuing
company needs a securities firm to provide an assurance that a certain amount of equity
funding will be obtained by the rights offering (effectively an "underwriting"), the most likely
structure would be:

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PLC - Japan moves to facilitate rights offerings

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to provide in the terms of the share option that the issuing company will buy back theoptions from existing shareholders who do not exercise the options prior to the exercise
date;
for the securities firm to provide an undertaking to purchase from the issuing company thebought-back options (then the securities firm will exercise the options and sell the newshares it obtains).
Under the current FIEA, the provision of the abovementioned undertaking by a securities firm
would not constitute an "underwriting of securities" for the purposes of that Act and would
therefore not be subject to the various regulations thereunder applicable to underwriting by
Financial Instruments Business Operators. However, the FSA report proposes to expand thescope of "underwriting of securities" to cover the same. Also, securities firms which provide
such undertakings may be inclined to encourage existing shareholders to exercise the options
in order to mitigate the risk they have undertaken as underwriters. Such activities would notconstitute an "offering" of securities under the FIEA, but the FSA report suggests to add
appropriate regulations to cover such activities (such as prohibition of false statements, etc.).
Dealing with foreign countries’ securities regulations. In the case of a shareholder who
resides in a foreign country, such shareholder's exercise of share options may trigger anobligation on the issuing company to make onerous registration or disclosure under suchforeign country's securities regulations. The FSA report states that further discussion isrequired on whether it would be permissible to exclude existing shareholders in foreigncountries from the rights offering process.

Resource information
Resource ID: 2-504-8637
Published: 28-Feb-2011
Products: PLC Cross-border, PLC Global Finance, PLC US Law Department

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