Proposed Amendments to the Cabinet Order for Enforcement of the Securities and Exchange Law and Related Ordinances of the Cabinet Office as Publicly Announced by the Financial Services Agency
On September 13, 2006, the Financial Services Agency publicly announced its proposed language for amendments (the "Proposed Amendments") to the Cabinet Order for Enforcement of the Securities and Exchange Law and related Ordinances. The Proposed Amendments follow an earlier amendment to the Securities and Exchange Law (the "Amended SEL"), including amendments to the rules for a take-over bid (a "TOB") and the filing of substantial shareholding reports.
2. Outline of the Amendments
2.1 Amendment to the TOB Rules
(a) Threshold for "rapid accumulations"
Under the Amended SEL, certain "rapid accumulations", made through a combination of negotiated transactions (including issuances of new shares) and market purchases are required to be performed in accordance with the TOB rules where a bidder would accumulate an interest in the target that is more than one-third (1/3) after the transaction.
Under the Proposed Amendments, a "rapid accumulation" is defined as the acquisition of more than 10% of the target's shares, either by purchasing existing shares or newly-issued shares, within a three-month period, of which more than 5% of such shares are purchased or acquired through negotiated, off-market transactions.
(b) Amendments to Disclosure Requirements for Investors
(i) Information required in a TOB registration statement
The Proposed Amendments require a bidder to provide more precise descriptions of what it intends to do after completing a TOB, such as its planned management policies of the target, and how it will act as a shareholder (including the possibility of additional share acquisitions and "going private" transactions).
In the case of a management buy-out or a TOB by a parent company for its subsidiary, the Proposed Amendments further require that a copy of a third party appraisal report, if relied on to determine the purchase price, be attached to the TOB registration statement. The purpose of this is to reduce potential conflicts of interest vis-à-vis other shareholders.
(ii) Target's obligation to issue opinions in TOBs
The Amended SEL requires that once a TOB commences, the target company must issue a written opinion on the TOB (the "Opinion Report"). The Proposed Amendments defined with greater specificity the matters to be included in an Opinion Report, which must be submitted within ten (10) business days from the date of public notice for commencing the TOB.
(iii) Target company's right to make inquiries to the purchaser
Under the Amended SEL, a target company is entitled to make inquiries to the bidder in the Opinion Report concerning the TOB. The bidder in turn is required to provide responses or give reasons why the bidder deems it appropriate not to respond (the "Response Report"). The bidder is required under the Proposed Amendments to issue its Response Report within five (5) business days of receiving the Opinion Report.
(c) TOB Period
(i) Length of TOB period
The currently allowable range for a TOB, no less than 20 nor more than 60 calendar days, will be changed to no less than 20 nor more than 60 business days under the Proposed Amendments.
(ii) Extension of TOB period upon request of the target company
Under the Amended SEL, a target will only be able to request an extension of the TOB period if the original TOB period is shorter than a "certain period" which the Proposed Amendments went on to define as 30 business days. In this case, a target may request that the TOB period be extended up to an aggregate 30 business day period.
(d) Increased flexibility in changing the terms of, or withdrawing, a TOB
(i) Reduction of purchase price
The current rules do not allow reducing the purchase price, but the Amended SEL will allow the bidder to lower the purchase price under "certain circumstances." The Proposed Amendments provide that such certain circumstances include cases where the target effects a stock split, allocates shares without consideration or engages in other dilutive acts.
(ii) Withdrawing a TOB
A bidder will have the right to withdraw its TOB where a target initiates or does not cancel defensive measures, in addition to the current grounds giving a right to withdraw, such as the merger of the target into another or initiation of bankruptcy proceedings.
Note that the grounds for withdrawing a TOB under the Proposed Amendments will not apply if the underlying triggering event is deemed to be immaterial.
(e) Obligations to purchase all shares
The Proposed Amendments require that the bidder make a TOB for all of the target's shares if the shareholding ratio after the TOB would be two-thirds (2/3) or more of the target.
Additionally, if a TOB will result in a two-thirds (2/3) or more interest in the target post-TOB, then the bidder must conduct a TOB for all of the voting shares of the target (unless voting-share classes that were excluded expressly waive such requirement at a shareholders meeting, etc.).
Furthermore, the period must be the same for all classes of shares subject to a TOB, and any differences in purchase price must be clearly outlined and explained in the TOB registration statement.
(f) Major shareholder increasing stake during another bidder's TOB
The Amended SEL prohibits a major shareholder (a shareholder owning over one-third (1/3) of a company's shares) from increasing its stake in a company over a certain percentage if that company is the target in a third party's TOB, and the Proposed Amendments would define this certain percentage as 5%. The exception to this prohibition is if the major shareholder attempts to increase its stake by initiating a competing TOB for the target.
(g) TOB restrictions on acquiring shares of a subsidiary
Current rules do not require a TOB if shares are acquired from ten (10) or less sellers and the purchaser owns more than 50% of the target. The Proposed Amendments, however, require such an acquisition to be done in accordance with the TOB rules if the shareholding ratio after the acquisition would be two-thirds (2/3) or more. The reason for this new rule is that there is a greater likelihood of a delisting in these cases, which may leave minor shareholders in the undesirable position of holding illiquid shares.
2.2 Amendments Relating to Substantial Shareholding Reports
(a) Expansion of the scope of Substantial Shareholding Reports
The Proposed Amendments expand the coverage of Substantial Shareholding Reports to include investment securities (such as units of J-REITs).
(b) Material action
Under current provisions, certain institutional investors and securities firms may under certain circumstances take advantage of a preferential reporting system regarding shareholding (the "Preferential Reporting System"), which reduces the required frequency of filing Substantial Shareholding Reports.
However, under the Amended SEL, the Preferential Reporting System will add a requirement that an eligible investor refrain from taking any "material action" toward the business of the target. The Proposed Amendments define a material action as a proposal to management or at the general meeting of shareholders regarding any of the following matters:
(i) sale or assumption of any material property
(ii) borrowing a large amount
(iii) election or dismissal of any representative director
(iv) any material change in the composition of directors and other officers
(v) election or dismissal of any general manager or any other important employee
(vi) establishment, change or closure of a branch office or any other important unit
(vii) any reorganization under the Business Corporation Law
(viii) transfer, acquisition, suspension or termination of all or a part of the business
(ix) any material change in the dividend policy
(x) any material change in the capitalization policies
(xii) listing of shares of any subsidiary
(xiv) petition for bankruptcy procedures
(c) Record dates for Preferential Reporting System
Under the current SEL, there are four (4) record dates per year for the Preferential Reporting System. Under the Amended SEL, the frequency of record dates will increase to twice a month. Any institutional investor intending to file a record date notification under the Preferential Reporting System must choose from one of the following combinations of dates:
(i) the 2nd and 4th Monday of each month (plus the 5th Monday, if any); or
(ii) the 15th day and the last day of each month.
(d) Purpose of shareholding
The Proposed Amendments require an investor to disclose its investment purpose in greater detail than under the current rules. For example, if the investor plans to take a "material action", the Substantial Shareholding Report must disclose such intention.
(e) Other notable changes
Other notable changes introduced by the Proposed Amendments include provisions concerning double counting of joint shareholders (who should be excluded from the total number of owned shares), the definition of joint holders, the reason for filing any amendment to Substantial Shareholding Reports, and reduced requirements for deemed joint holders.
2.3 Disclosure in Share-for-Share Exchanges and Other Transactions
(a) Under current provisions, a company (the "Disclosing Company") is required to file an Extraordinary Report (similar to a current report under U.S. securities laws) in accordance with the disclosure requirements in the case of a reorganization such as a share-for-share exchange, unless the share-for-share exchange is with a company that is much smaller than the Disclosing Company with respect to assets and other financial indicators.
However, because shareholders of the Disclosing Company and other investors will usually regard any information relating to a share-for-share exchange as material, even with small-scale companies, the Proposed Amendments will lower the threshold for deeming such exchanges as being "material" to the Disclosing Company.
(b) The Proposed Amendments added the following matters to be included in an Extraordinary Report, in order to improve informational disclosures to protect investors:
(i) amount of net assets, sales, business profit and other financial metrics of the counterparty to the Disclosing Company for the last three (3) fiscal years;
(ii) names or trade names of major shareholders, and the shareholding percentage of major shareholders in proportion to the total number of issued shares;
(iii) basis for the calculation of the share-for-share exchange ratio (in case of share-for-share exchanges) and other terms etc.; and
(iv) trade name, business line of the new corporation to be incorporated or the parent company as a result of the share-for-share exchange or other transaction.
(c) The Proposed Amendments provide that an Extraordinary Report must be filed when a decision is made to execute a share-for-share exchange or other transaction.
2.4 Information to be Disclosed in Securities Reports
In keeping with the Business Corporation Law, which became effective in May 2006, the Proposed Amendments include provisions relating to information to be disclosed in documents such as annual securities reports, including matters concerning types of shares and share subscription rights, the number and method of distribution of profit, and matters such as corporate governance practices.
3. Date of Enforcement
3.1 Amendments to the TOB rules, and those relating to the Preferential Reporting System (with respect to material actions) are proposed to become effective by the end of November 2006.
3.2 Amendments to the requirements of Substantial Shareholding Reports, other than the amendments mentioned in 3.1 above, are scheduled to become effective as of January 1, 2007.
3.3 Amendments to the disclosure requirements in share-for-share exchanges and other transactions and those relating to informational disclosures in order to maintain compliance with the Business Corporation Law are scheduled to become effective by the end of November 2006.
Note that amendments concerning information disclosed in annual securities reports and semi-annual securities reports will initially only apply to annual securities reports to be filed for the first business year ending on or after this enforcement date, and semi-annual securities reports to be filed for the first semi-annual accounting period ending on or after this date.
* Amendments making it obligatory to electronically file Substantial Shareholding Reports and other filings via the EDINET system are scheduled to become effective as of April 1, 2007.