January 2024
No. A&S_029

Overview of the Report of the Working Group on Tender
Offer Rules and Large Shareholding Reporting Rules of the
Financial System Council (December 25, 2023)
I.

Introduction

The Financial System Council made a decision to review the rules of tender offers and large shareholding
reporting on March 2, 2023. Subsequently, the Working Group on Tender Offer Rules and Large
Shareholding Reporting Rules began deliberations on June 5, and released its report (the Report of theWorking Group on Tender Offer Rules and Large Shareholding Reporting Rules of the Financial System
Council) on December 25 1. With 17 years having passed since the previous round of amendments, thereview of the tender offer and large shareholding reporting rules is expected impact various players,
including listed companies, investors and financial institutions, on a practical level. This newsletter
provides a brief overview of the report.

II. Overview of Report1.

Tender Offer Rules(1) Main Proposals
Based on changes in the market environment including the increase in the number of hostile take overs
through market transactions, etc. and the diversification of M&A practices, the report makes the following
proposals regarding tender offer rules 2.
① A tender offer should be obligatory when a market transaction would have significant
impact on company control in order to ensure transparency and fairness of capital
markets
Recently there have been cases where more than a third of voting rights have changed through amarket (on-floor) transaction within a short period of time, and it has become apparent that generalinvestors have not had sufficient information or time to make investment decisions regarding suchtransactions, which have a significant impact on company control. Consequently, the report proposes
applying a one-third rule to market (on-floor) transactions in order to ensure transparency andfairness in securities transactions which result in significant changes in company control.
If the one-third rule is to be applied to the acquisition of shares through market transactions, then it
will be necessary to track and control the state of market transactions so as to comply with the rule. In
particular, the control structure may need to be reviewed in financial groups consisting of numerous
group companies. The change is also likely to impact the purchase methods employed on the buyer
side. As such, it will be necessary to keep an eye out for future amendments.
1The full report (in Japanese) can be viewed at the FSA website:

https://www.fsa.go.jp/singi/singi_kinyu/tosin/20231225.html

2In addition to the proposals mentioned in this newsletter, the report also makes suggestions regarding clarifying the scopeof application of the so-called 5% rule, notice of a tender offer and other topics.
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January 2024
No. A&S_029② The threshold for "significant impact on company control" should be lowered from"one-third of voting rights" to "30% of voting rights" in light of voting rights ratios andinternational standards
The report proposes that it would be appropriate to lower the one-third rule threshold to 30% in lightof the fact that many foreign tender offer systems set the threshold for mandatory tender offers at 30%,and considering the ratio of voting rights exercised in listed companies in Japan, a shareholder having
30% of voting rights can often prevent many listed companies from passing a special resolution at a
general shareholders meeting and may have a significant impact on ordinary resolutions at ashareholders meeting.
However, even if the threshold is lowered slightly from one third (approx. 33.4%) to 30%, the practical
impact is likely to be limited. Currently, the guidelines for responding to corporate takeovers (so-calledtakeover defense measures) often require investors to take various actions based on a 20% threshold,but there has been no discussion of lowering the one-third rule threshold to 20%, and it is expectedthat each listed company will continue to create guidelines for responding to corporate takeovers andtake other actions to respond to acquisitions of 20% to 30%, as necessary.
③ Companies should be obligated to explain their handling of conflicts of interest withminority shareholders after a tender offer in the case of a tender offer with a maximum
number of shares to be purchased
Under current tender offer rules, partial tender offers (tender offers with a maximum limit) arebasically allowed, but such partial tender offers may cause several problems. Namely, if the corporate
value of the target company is expected to decrease after the acquisition of control, generalshareholders may have an incentive to tender their shares in the tender offer even if they are
dissatisfied with the tender offer price, etc. in order to avoid disadvantages caused by the decrease incorporate value (the so-called "coercion" problem). Moreover, even though conflicts of interest may
arise or change between the controlling shareholder and general shareholders due to a change ofcontrolling shareholder, the system of pro rata settlement does not guarantee that all tendered shares
will be sold, and as such, general shareholders may not be given sufficient opportunities to sell theirshares. In light of these inherent problems of partial tender offers, the report states that the bidder ina tender (and the company consenting to such partial tender offer) should at least make efforts to gain
the understanding of general shareholders when conducting a partial tender offer, and proposes
strengthening regulations regarding disclosure in tender offer statements, as well as imposing an
obligation to explain policies for handling conflicts of interest with minority shareholders arising after
a partial tender offer and responding to opposition from general shareholders. The report further
recommends that the bidder should be able to set an additional tender period after the tender offer iscompleted at its discretion, including in the case of a tender offer for all shares (a tender offer with no
maximum limit).
The Working Group also discussed whether partial tender offers should be prohibited entirely, butultimately decided that the issue requires further consideration given opinions that doing so might
have the effect of discouraging desirable M&A transactions. As such, while partial tender offers willremain as a possible M&A method, it should be noted that providing sufficient explanations of various
treatments after the partial tender offer will be required.
④ A system that allows exceptional treatment as necessary for individual cases should beestablished and the necessary systems of regulatory authorities reinforced to avoid
uniformity that does not correspond to actual conditions
The current tender offer rules establish various regulations regarding the conditions of tender offers,
but do not permit case-by-case exceptional treatment from a practical perspective. The report
therefore proposed that, on the presumption that the regulatory authorities' system will continue tobe reinforced, the following regulations should be amended so as to allow requirements to be waived
on a case-by-case basis upon obtaining the regulatory authority's approval.
 Regulations on prohibition of separate purchases
 Regulations concerning specially related parties (including the exclusion from the scope of
specially related parties in certain cases, regardless of the existence of certain capital relationships)
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January 2024
No. A&S_029

 Regulations concerning the tender offer period (including allowing a voluntary extension
exceeding 60 business days or waiving or shortening the mandatory extension period following anamendment of the tender offer statement in certain cases) Regulations concerning the change of tender offer terms
 Regulations concerning the withdrawal of tender offers
 Regulations concerning obligations to make a tender offer/solicitation for all shares (including theexclusion of foreign depositary receipts from the scope of the obligation to solicit for all shares incertain cases)
If a system that allows for exceptional treatment in individual cases is established, it can be expected
to promote a more practical approach. On the other hand, if the authorities' discretion is expanded,
there is a concern that tender offerors may be required to take measures they are reluctant to takebecause of the authority's decision. Overall, the expectation is that the regulatory authorities' systems
will be reinforced to allow them to act more appropriately in the future.
(2) Issues for further consideration
Major issues that were considered for discussion but not recommended include the following.
① European-style regulations
The Working Group discussed the possibility of moving towards European-style regulations, underwhich the tender offer system is positioned as a tool to ensure that minority shareholders have an
opportunity to sell their shares at a fair price in the case where company control would change as aresult of the transaction, the necessity of a tender offer is not determined by type of transaction,
conducting a subsequent tender offer is obligatory in principle if a certain threshold is exceeded,
partial tender offers are prohibited in principle, and minimum price regulations are adopted. As aresult of the deliberations, the Working Group did not conclude that Japan should immediately shift
towards European-style regulations, but the possibility of a future move towards such regulations
should be kept in mind, while reviewing individual issues, including the scope of application of tender
offer rules and whether or not partial tender offers should be allowed, and continue to be consideredbased on the progress of authorities in implementing systems for making decisions according toindividual circumstances.
Japan's tender offer rules have developed into a unique system that falls somewhere between the U.S.style and European-style systems. The transition to European-style regulations will remain an issue
for the future, but for the time being, the expectation is that the current system will be amended toaddress issues arising from changes in social conditions, etc., without making fundamental changes
in the system itself.
② Remedies before/after tender offer
The Working Group considered whether a system for remedies before/after a tender offer should becreated. Specifically, the Working Group considered whether systems should be implemented should
to grant a right to petition for an injunction against a tender offer in case of a breach of laws or
regulations or use of clearly unfair methods by the company or its shareholders as a means of priorremedy, and to suspend voting rights of shares acquired in breach of tender offer rules, and considered
a proposal to impose a sale order as a post tender offer remedy. While the Working Group did notconclude that such systems should be introduced immediately, the issue was left open for further
consideration in the future should the need arise.
2.

Large Shareholding Reporting System and Transparency of Beneficial Shareholders(1) Main Proposals
The following main recommendations were made with respect to the large shareholding reporting systemand transparency of beneficial shareholders, due to changes in the market environment, including the3©Atsumi & Sakai 2024

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No. A&S_029

increase in passive investment, the growing importance of constructive dialogue between companies andinvestors, and the expansion of collaborative engagement 3.
① The possibility of receiving a special exception relaxing the frequency of reportsubmission requirements for making a proposal "for the purpose of an action that is
not directly related to corporate control" in a manner that "leaves the decision to the
management of the company" should be clarified in order to enable in-depth dialogue
between passive investors and companies
If financial instruments business operators, etc. wish to use the special reporting system (including arelaxed reporting frequency), one of the requirements is that their purpose of holding shares is not toengage in making material proposals. However, although a certain degree of clarity with respect to thescope of "making material proposals" was achieved with the formulation of the Stewardship Code in2014, the scope of the rule remains vague or broad. As such, it has been pointed out that further
clarification or limitation of the rule is necessary to promote effective engagement between companies
and investors. The concept of "making a material proposal" focuses on the influence of the act oncompany management and if shares are held for the purpose of making such proposals, then theshareholder is required to make prompt disclosures using the general reporting system instead of thespecial reporting system. However, in cases where the purpose of the proposal is not directly related
to company control, such as proposals for a change in dividend policy or capital policy, it is difficult to
say that the mere act of making a proposal will immediately have significant impact on management.
The report therefore suggests that making proposals the purpose of which is directly related tocompany control should be broadly regulated as the making of material proposals, whereas the focus
for proposals that are not directly related to company control should be the manner of proposal, andthe act of making a proposal should only be regulated if the manner of the proposal is such that theissuing company's management cannot make a decision on whether or not to adopt the proposal.
It is expected that a revision of the scope of "making material proposals" will clarify the availability ofthe special reporting system and promote engagement activities by institutional investors.
② From the perspective of promoting collaborative engagement, there should be no needto aggregate the percentage of ownership of multiple institutional investors as "joint
holders" unless they have made certain agreements
It has been pointed out that while the application of the concept of joint holders in the context of thelarge shareholding reporting system is limited to situations where parties have made agreements asshareholders regarding voting rights and other rights, and therefore could be thought to have no direct
relationship with collaborative engagement, institutional investors are nonetheless discouraged fromcollaborative engagement due to the inclusion of implied agreements in such agreements. Given thatthe concept of joint holding is a rule where the focus is on the impact on management, the report
therefore proposes that in order to reduce such discouraging effect related to collaborative
engagement by institutional investors, it would be appropriate not to apply the concept of joint holding
in cases where institutional investors have not made a joint agreement related to the making ofmaterial proposals, and where they have made non-continuous agreements related to the exercise of
voting rights.
Excluding certain cases from the application of the joint holding concept is expected to promote
institutional investors' collaborative engagement activities. On the other hand, there have also beencases where parties which should submit large shareholding reports as joint holders have not madethe appropriate disclosures, and as mentioned in footnote 3, the report also makes proposals related
to ensuring the effectiveness of the large shareholding reporting system. With respect to the difficultyof proving the existence of a joint holder relationship, these include expanding regulations to the effectthat a person is deemed to be a joint holder if certain external facts exist.

3The report also made recommendations regarding other issues, such as ensuring the efficiency of the large shareholding
reporting system. The report concludes that an appropriate response is necessary for a number of issues, but among those,particularly noteworthy is the conclusion that "with respect to the issue that parties may be deemed to be joint holders
despite having a policy of exercising voting rights, etc., independently if certain capital relationships exists, a system should
be introduced to allow authorities to exempt the application of classification as joint holders under certain circumstances,"
which may have a practical impact on large shareholding reporting by financial groups.

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January 2024
No. A&S_029③ Cash-settled equity derivative transactions that potentially have influence overmanagement or circumvent rules
Under current rules, simply holding a long position in cash-settled equity derivative transactions isbasically not subject to the large shareholding reporting system. However, there have been cases ofcash-settled equity derivative transactions which are intended to be converted into physical stocksettled equity derivative transactions, and cases where engagement targeting the issuing company isconducted upon having such a position. It has been pointed out that in such cases information
disclosure under the large shareholding reporting system should be required. The report suggests thatin such cases it is possible to determine that there is potential for influence over management alreadyat the time of commencement of the cash-settled equity derivative transaction, and that thetransaction effectively circumvents the large shareholding reporting system, and therefore it isappropriate to apply the large shareholding reporting system. The report envisions regulations toapply in situations where (i) the purpose is to acquire shares from the counterparty to the transaction,(ii) the purpose is to have a certain influence over the exercise of voting rights in shares held by thecounterparty to the transaction, and (iii) the purpose is to make material proposals to the issuing
company based on having a position such as those described in (i) and (ii).
Regulating such transactions which may potentially have an impact is considered to be an exceptionalcase, and as per the following statement made in the report, in principle holding a long position in a
cash-settled equity derivative transaction is not intended to be subject to regulations.
"If we emphasize the fact that the large shareholding reporting system is a system that requires
information disclosure focusing on the impact on management, the need to require information
disclosure is not high for cash-settled equity derivative transactions conducted for the purpose ofgaining financial profit and which do not involve a transfer of voting rights or other shareholder
rights." (Underline added by the author.)
As such, although the envisioned application of regulations under (iii) above is abstractly worded andits scope of application is unclear, based on the above explanation of the main principle and exceptions
to it, it can be understood that (iii) above refers to cases where an investor holds a long position in a
cash-settled equity derivative transaction that is unknown to the issuing company and indicates to theissuing company that it is able to exercise more voting rights. In any case, it is hoped that the issue
will be clarified in the future legislative process.
④ In the interest of transparency and effective identification of beneficial shareholders,(1) it should be clarified that as a principle of conduct institutional investors should
respond to questions from issuing companies regarding their shareholdings, and (2)imposing an obligation to do so under the legal system should be considered
Under the current system, issuing companies and shareholders are able to identify nominee
shareholders from the shareholder register and disclosure of the status of large shareholders in annual
securities reports. On the other hand, there is no system for them to identify parties holding
investment rights or rights to give instructions on the exercise of voting rights (so-called beneficial
owners) unless the threshold of the large shareholding reporting system (holding over 5% of shares)
is exceeded. Therefore, it has been pointed out that practical consideration should be made withreference to systems in other jurisdictions so that the issuing company and other shareholders canefficiently identify beneficial shareholders and the number of shares they hold, in order to promotedialogue between companies and shareholders/investors. Specifically, the report proposes that, as thefirst, and urgent step, it should be clarified that the principle of conduct for institutional investors
should be to respond to questions regarding their shareholdings from issuing companies, andsubsequently responding to such questions should be made legally obligatory.
Issuing companies have long pointed out the issues presented by the absence of a system to identify
beneficial shareholders, and it is hoped that, as a result of this proposal, a means of identifying
beneficial shareholders will be put in place through questions from issuing companies.
(2) Issues for further consideration
There were opinions within the Working Group that the most potent way to ensure the effectiveness of thelarge shareholding reporting system would be to follow Europe's example and create a system where the5©Atsumi & Sakai 2024

January 2024
No. A&S_029

voting rights of shares held by a person who has breached the large shareholding reporting system can besuspended. However, such a system entails issues similar to those discussed in relation with the tender
offer rules, and were left open for further consideration if necessary.

III. Future Developments and Impact on PracticeIn terms of future developments, it is possible that the FSA and related ministries will prepare anamendment draft and submit it for discussion by this year's ordinary session of the Diet as a bill to amend
the Financial Instruments and Exchange Act as a response to the report on the tender offer rules and large
shareholding reporting system. Although there is no certainty at this time, if the amendment bill isdeliberated in this year's ordinary Diet session and enacted in May or June, it could be expected to go into
effect approximately one year later, after amendments to cabinet orders and cabinet office orders.
Developments in the so-called soft law front would be expected to proceed in parallel, including withrespect to the proposal concerning the code of conduct of institutional investors regarding transparency ofbeneficial shareholders (Japanese Stewardship Code).
Changes to tender offer rules and the large shareholding reporting system will have a practical impact onvarious players, including listed companies, investors, and various financial institutions, in terms of M&A
practices, the investment behavior of investors, and the responses of various financial institutions involvedin these activities.
---------------------------------------------------------------------------------------------------------------------------THIS NEWSLETTER IS PROVIDED FOR INFORMATION PURPOSES ONLY; IT DOES NOTCONSTITUTE AND SHOULD NOT BE RELIED UPON AS LEGAL ADVICE.
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Author/Contact
Yukihito Machida
Partner
E: yukihito.machida@aplaw.jp
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January 2024
No. A&S_029
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