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2006. 12.04
Disclosure Requirements of Issuance and Delivery of Securities in connection with Corporate Reorganization
By Atsushi Takahashi
This newsletter examines new disclosure requirements applicable to issuances and delivery of securities in connection with corporate reorganizations under the Financial Instruments and Exchange Law (the "FIEL"), promulgated on June 14, 2006 and scheduled to become effective by December 14, 2007.
1. New Disclosure Requirements
In response to the growing number of mergers, acquisitions and other corporate reorganizations recently in Japan, the FIEL sets forth new disclosure requirements for issuances and delivery of securities in connection with corporate reorganizations with a view to enhancing disclosure1 . No draft Enforcement Order or Cabinet Office Ordinance concerning the implementation of these requirements has been published as of the date of this newsletter.
Under the current Securities and Exchange Law, the issuance or delivery of shares in a consolidation, amalgamation, merger (gappei), share exchange (kabushiki kokan), or corporate split (kaisha bunkatsu) does not constitute a public offering or sale of securities2 because it does not involve solicitation for the acquisition of such shares. Therefore, filing a securities registration statement is not required for such corporate reorganization, although in certain cases a company that is subject to continuous disclosure obligations must submit an extraordinary report in connection with a corporate reorganization3 . Under the FIEL, certain Corporate Reorganization Issuance Procedures (soshiki saihensei hakko tetsuzuki) (see Sections 3 through 5 below) and Corporate Reorganization Delivery Procedures (soshiki saihensei kofu tetsuzuki) (see Sections 6 and 7 below) will be included in the definitions of a public offering and sale of securities, respectively, that require the filing of a securities registration statement. As a result, an issuer of such securities will be subject to disclosure obligations under the FIEL.
2. Disclosure Requirements Governing Issuance and Delivery of Securities
Where new disclosure requirements governing issuance and delivery of securities under the FIEL are applicable, neither Specified Corporate Reorganization Issuance Procedures (tokutei soshiki saihensei hakko tetsuzuki) nor Specified Corporate Reorganization Delivery Procedures (tokutei soshiki saihensei kofu tetsuzuki) described below may be commenced (Article 4(1) of the FIEL)4 .
Furthermore, if an allotment date is set in order to determine the shareholders that will receive securities to be issued or delivered in connection with a corporate reorganization, the issuer of such securities must file a securities registration statement at least 25 days before such allotment date (Article 4(3) of the FIEL)5 .
Moreover, until the securities registration statement becomes effective, an issuer may not allow any owners of stock certificates or other types of equity and equity-related instruments specified by Enforcement Order ("Equity Instruments") that are issued by a "Target Company" (soshiki saihensei taisho kaisha)6 to acquire securities to be issued in connection with a corporate reorganization (Article 15(1) of the FIEL). In addition, the provisions concerning civil and criminal liabilities for material misstatements and other provisions governing public offerings or sales of securities will apply (Article 18 and other provisions of the FIEL), except for the provisions concerning the delivery of prospectuses (Article 13 and Article 15(2)-(6) of the FIEL; see also Articles 4(1) and (2) of the FIEL).
The following is an overview of Specified Corporate Reorganization Issuance / Delivery Procedures subject to the new disclosure requirements.
3. Specified Corporate Reorganization Issuance Procedures
Under the Corporation Law, corporations must take certain actions and abide by certain procedural requirements, such as maintaining a company's corporate documents at its principal office, in the event of a consolidation, amalgamation, merger, corporate split7 , share exchange, or other corporate reorganization.
Under the FIEL, certain actions and procedures for the issuance of securities in connection with a corporate reorganization, such as maintaining corporate documents at the issuer's principal office, are defined as "Corporate Reorganization Issuance Procedures" (Article 2-2(2) of the FIEL).
Furthermore, the FIEL provides that Corporate Reorganization Issuance Procedures fall within "Specified Corporate Reorganization Issuance Procedures," if (1) the number of owners of Equity Instruments of the Target Company is equal to or more than a specific number8 prescribed by Enforcement Order, or (2) Type 1 Securities9 are issued in connection with a corporate reorganization unless such issuance falls within certain exemptions10 . Such Specified Corporate Reorganization Issuance Procedures must be carried out in accordance with the FIEL (Article 2-2(4) and Article 4(1) of the FIEL).
4. Exemptions Applicable to New Disclosure Requirements
The new disclosure requirements under the FIEL do not apply to all Specified Corporate Reorganization Issuance Procedures.
One exemption from the new disclosure requirements is available where no disclosure regarding Equity Instruments issued by a Target Company is made under the FIEL (Article 4(1)(ii)(a) of the FIEL).
In addition, another exemption from the new disclosure requirements is available where the disclosure regarding the securities to be issued to the owners of Equity Instruments of a Target Company is already made under the FIEL (Article 4(1)(ii)(b) of the FIEL).
The following table sets out the applicability of the new disclosure requirements.
5. Example -- Share Exchange Subject to Specified Corporate Reorganization Issuance Procedures
Taking a share exchange as an example, if (1) Company A becomes a wholly-owned subsidiary of Company B pursuant to a share exchange agreement, (2) Company B issues its own securities, such as share certificates or membership interests, to the owners of Equity Instruments of Company A, where the number of such owners is equal to or more than a prescribed number11 , then the securities issuance procedures carried out by Company B will fall within Specified Corporate Reorganization Issuance Procedures, and Company B will be subject to disclosure obligations with respect to the issued securities, unless it is exempt from the new disclosure requirements in accordance with Section 4 above (see Figure 1).
Figure 1: Share Exchange Subject to the Specified Corporate Reorganization Issuance Procedures
6. Specified Corporate Reorganization Delivery Procedures
In a corporate reorganization, treasury shares rather than newly-issued securities may be delivered as consideration to the owners of Equity Instruments of a Target Company. Also, certain provisions in the Corporation Law propose to allow a surviving company (in the case of a merger) or a parent company (in the case of a share exchange) (each such company, an "Acquiring Company") to use and deliver cash, securities and other assets rather than shares issued by the Acquiring Company as consideration to shareholders of a Target Company. Debt securities issued by the Acquiring Company or securities issued by a company other than the Acquiring Company may be delivered to the owners of Equity Instruments of such Target Company12 .
The FIEL defines "Corporate Reorganization Delivery Procedures" as certain actions and procedures (e.g., maintaining contracts) to be carried out by an Acquiring Company under the Corporation Law in connection with a corporate reorganization where existing securities rather than newly-issued securities are delivered as consideration to shareholders of the Target Company (Article 2-2(3) of the FIEL).
Similar to the Corporate Reorganization Issuance Procedures, the FIEL provides that Corporate Reorganization Delivery Procedures fall within "Specified Reorganization Delivery Procedures" if the number of owners of Equity Instruments of a Target Company is equal to or more than a specific number prescribed by Enforcement Order. Such Specified Corporate Reorganization Delivery Procedures must be carried out in accordance with the FIEL (Article 2-2(5) and Article 4(1) of the FIEL).
Moreover, similar to the Corporate Reorganization Issuance Procedures, certain exemptions will apply where a closely-held corporation is the Target Company, or where a subsidiary of a listed or over-the-counter company becomes an Acquiring Company and delivers publicly-traded shares of its parent company as consideration.
7. Example -- Merger Subject to Specified Reorganization Delivery Procedures
Taking a triangular merger as an example, if (1) Company C allocates and issues13 its share certificates, membership interests or other securities to Company B, a subsidiary of Company C, (2) Company B merges with Company A pursuant to a merger agreement, and (3) Company B delivers the securities it received from Company C to the owners of Equity Instruments of Company A, where the number of such owners is equal to or more than the prescribed number, then the securities delivery procedures carried out by Company B will fall within the Specified Corporate Organization Delivery Procedures. Therefore, Company C will be subject to disclosure obligations with respect to the delivered securities, unless it is exempt from the new disclosure requirements in accordance Section 6 above (see Figure 2).
Figure 2: Triangular Merger Subject to Specified Corporate Reorganization Delivery Procedures
8. Application of New Disclosure Requirements to Acquisitions of Japanese Companies by Non-Japanese Companies
Although these regulations require disclosure when a closely-held corporation becomes an Acquiring Company , it is unlikely that such an acquisition would be made by using securities issued by such Acquiring Company resulting in the issuance / delivery of such securities being subject to the new disclosure requirements, when taking into account the difficulty of determining the value of the securities issued by a closely-held corporation.
Therefore, we anticipate that the new disclosure requirements would apply mainly in cases where, after the implementation of relevant provisions in the Corporation Law referred to in the first paragraph of Section 6 above, a non-Japanese company that issues securities traded on a securities market outside of Japan (unless disclosure under the FIEL regarding such securities is already made) uses a triangular merger or other means to acquire a listed or over-the-counter company that issues shares or other securities traded on a securities market in Japan, and as a result, the shares issued by the non-Japanese company will be issued or delivered to the owners of Equity Instruments of such Japanese listed or over-the-counter company.
9. Continuous Disclosure Requirements
Any issuer of securities that are issued or delivered as a result of a corporate reorganization that is subject to the new disclosure requirements described above is required to make continuous disclosures under the FIEL and must file securities reports and other documents thereunder (Article 24(1)(iii) of the FIEL). In that case, other relevant provisions, such as those concerning the effectiveness of security registrations and the liability of related persons in connection with material misstatements in such reports or documents, will also apply (Article 24-3, Article 24-4, and other provisions of the FIEL).
- Yoshiyuki Taniguchi and Akifumi Nomura, "Kigyō Naiyō Tō Kaiji Seido No Seibi (Improvement of the Disclosure System for Corporate Information, etc.)," Shoji Homu, No. 1773 (2006), p. 45; Hidenori Mitsui and Yuichi Ikeda, Eds., Ichimon Itto Kinyu Shohin Torihiki Ho (Questions and Answers on the Financial Instruments and Exchange Law), Shoji Homu (2006), p. 113 (Yoshiyuki Taniguchi, et. al)
- See Items 2-4 (4) and (5) of the Guidelines concerning the Disclosure of Corporate Information. For securities issued overseas, see items 23-14-1(2) and (4) of the same.
- See Article 24-5(4) of the Securities and Exchange Law, and Article 19(2)(ii), Article 19(2)(vi)-2 and each Item thereafter of the Cabinet Office Ordinance concerning the Disclosure of Corporate Information. The amendments to this Cabinet Office Ordinance that became effective in December 2006 lowered the threshold regarding materiality for filing an extraordinary report, expanded the scope of corporate reorganizations subject to such filing requirements, and enhanced information to be provided in extraordinary reports.
- If a company undergoes a corporate reorganization that is subject to new disclosure requirements, an issuer of securities to be issued or delivered in connection with such corporate reorganization must prepare to file a securities registration statement in addition to carrying out ordinary preparations for such corporate reorganization. In particular, if an issuer is a non-Japanese company it will not be permitted to make its disclosure for such issuance or delivery in English (see Article 24(8) and other provisions of the FIEL). Therefore, such issuer must prepare to file a securities registration statement in Japanese, which is likely to affect significantly the workload, time and cost needed for this type of reorganization.
- However, this will not apply in cases where the requirements set forth by Cabinet Office Ordinance are met, such as the issue or sale price of the securities.
- "Target Company" is defined in the FIEL to mean the company to be merged into another company in a merger, the company to become a wholly owned subsidiary in a share exchange and other companies prescribed by Enforcement Order (Article 2-2(4) of the FIEL).
- Although the definition of corporate reorganization (Article 2-2(1) of the FIEL) expressly includes corporate splits, there is no specific reference to corporate splits in the definitions of Specified Corporate Reorganization Issuance Procedures and Specified Corporate Reorganization Delivery Procedures (Articles 2-2(4) and (5) of the FIEL). This seems to be partly because in a corporate split the target company receives securities of the succeeding / newly-established company, but in a merger or share exchange the securities of the surviving company or parent company are directly issued or delivered to owners of stock certificate. Under the former Commercial Code, corporate splits (jinteki bunkatsu) may be consummated in a manner such that the shares are distributed directly to shareholders of the target company. However, such type of corporate split is not set forth in the Corporation Law. Instead, the Corporation Law provides for the acquisition of class shares with the condition for the company to acquire all of such class shares upon an extraordinary resolution at a shareholders meeting (zenbu shutoku joko tsuki shurui kabushiki) or for the distribution of surplus to achieve a similar result in such type of corporate split, coupled with a corporate split contemplated under the Corporation Law. It will be necessary to pay attention to the establishment of, and amendments to, regulations in the future to determine whether the acquisition of such class shares or the distribution of surplus, in certain cases, will become subject to the Specified Corporate Reorganization Issuance / Delivery Procedures.
- The FIEL provides that this prescribed number of owners of Equity Instruments must be (1) "a number of persons" (tasu no mono) in the event of the issuance of Type 1 Securities such as share certificates or electronic securities representing shares of a stock company (kabushiki kaisha) or (2) "a substantial number of persons" (soto teido tasu no mono) in the event of the issuance of Type 2 Securities such as membership interests in a limited liability company (godo kaisha) or other types of companies provided in the FIEL and regulations thereunder. Specific numbers will be prescribed by Enforcement Order (Article 2-2(4) of the FIEL). Type 1 Securities are defined as securities set forth in Article 2(1) of the FIEL and interests represented by securities (yuka shoken hyoji kenri) that are deemed to be securities for certain purposes pursuant to the provisions of Article 2(2) of the FIEL (Article 2(3) of the FIEL). Type 2 Securities are defined as "deemed" securities (minashi yuka shoken) set forth in Article 2(2) of the FIEL (Article 2(3) of the FIEL).
- See Footnote 8.
- The FIEL provides for some requirements similar to those in connection with private placements to qualified institutional investors or private placements to a small number of investors (details will be set forth in an Enforcement Order) considering the resale possibility of the issued securities. Many corporate splits of a company for the purpose of corporate group reorganization are expected to fall within such exemption.
- Since the number of owners of Equity Instruments changes daily, it will be necessary to pay attention to the establishment of, and amendments to, regulations under the FIEL and any discussions regarding such regulations in order to know when to determine such number.
- The relevant provisions of the Corporation Law will become effective on the first anniversary of the enforcement date thereof (May 1, 2006) (Item 4 of the Supplementary Provisions of the Corporation Law).
- Although a subsidiary is generally prohibited from acquiring the shares of its parent company, it is specifically permitted to do so to the extent necessary to deliver shares of its parent company to the shareholders of the target company in certain corporate reorganizations, such as a merger in which such subsidiary becomes the surviving company (Articles 800(1) and 135(2)(v) of the Corporation Law, and Article 23(8) of the Enforcement Regulations of the Corporation Law).
