PRINT THIS PAGE New corporations law in the pipeline02/11/2005. Source: Baker & McKenzie. Chris Hodgens and Norihiro Sekiguchi
On 22 March 2005, the Japanese Ministry of Justice submitted a new Bill to the Diet which, when enacted, will establish for the first time an independent and consolidated code of company law in Japan, says Baker & McKenzie. The new Bill contains just short of 1,000 clauses and is regarded as introducing the most sweeping changes to corporate law in Japan in the last half century. Most of the legislation is expected to come into effect between April and June 2006 next year, with more controversial provisions dealing with acquisitions of Japanese corporations using shares in foreign companies expected to come into force in 2007. The key changes expected to come into force are summarised below.
Abolition of Yugen Kaisha
The yugen kaisha (YK) is a limited liability company analogous to the German GmbH. YKs are typically used by small ‘mom and pop’ business operations in Japan but US investors sometimes use the YK as a pass-through vehicle for US tax purposes. After the Corporations Law comes into effect, it will no longer be possible to incorporate a YK. In addition, transitional provisions will automatically convert existing YKs into kabushiki kaisha (KKs) but allow them to continue to trade under the YK name for the time being.
KKs do not have pass-through status for US tax purposes and so it is possible that YKs that convert into KKs when the Corporations Law comes into effect will lose their pass-through status for US tax purposes.
Overhaul of Kabushiki Kaisha
The new Corporations Law will provide for three different types of KK:
i. A KK with no restrictions on share transfers (Open KKs); and
ii. Two types of KKs with restrictions on share transfers (Closed KKs):
- A Closed KK with a Board of Directors; and
- A Closed KK without a Board of Directors (akin to the existing YK).
Other changes to the KK include:
i. Simplification of incorporation procedure;
ii. Abolition of the minimum capital amount of ¥10 million required at incorporation (but the new KK will need to have net assets of ¥3 million to distribute profits); and
iii. Closed KKs without a Board of Directors may have a single director (instead of the current minimum of three directors).
Abolition of Valuation Requirement for 'Post-incorporation Asset Acquisition' (Jigo Setsuritsu)
Under current laws, in broad terms, a company that has been in existence for less than two years currently cannot acquire business assets of a value exceeding 5% of its capital without having a court-appointed inspector or recognised professional certify the value of the assets to be acquired (so-called ‘post-incorporation asset acquisition’ rule).
Valuation by a court-appointed inspector typically takes several weeks if not months.Valuation by a recognized professional is potentially faster but not many recognized professionals are prepared to conduct the valuation.
Consequently, in many instances this rule effectively precludes the use of a newly incorporated company as an acquisition vehicle for purposes of private equity investments in Japan.
Private equity investors wanting to avoid valuation have typically needed to acquire (and to conduct due diligence on) dormant companies that pass the ‘age test’ in order to source an acquisition vehicle.
The new Corporations Law abolishes this valuation requirement, clearing a major obstacle to the use of newly incorporated companies as acquisition vehicles in private equity investments.
Corporate Governance
Under the new Corporations Law, articles of incorporation will have greater prominence as a source of corporate governance rules. A KK will be able to specify the limits on the powers of its directors in its articles of incorporation and prescribe the number of votes required to pass resolutions at shareholder meetings regarding such matters as mergers and acquisitions and the appointment and dismissal of directors.
The board of directors of a KK may pass resolutions in writing or electronically provided (a) they are permitted to do so by the articles of incorporation, (b) all of the directors consent to the matter which is the purpose of the resolution, and (c) the statutory auditor(s) do not express any particular opinion regarding the matter.
Mergers
Currently, a merger will require the approval of the shareholders of the surviving corporation (as well as the disappearing corporation) except where the number of new shares to be issued to the disappearing corporation is no greater than 5% of the number of outstanding issued shares of the surviving corporation. Under the new Corporations Law, this percentage will be increased to 20%, giving Boards greater control over the merger process.
In addition, the new Corporations Law introduces a ‘short form merger’ under which a merger between a parent company and its subsidiary will not require shareholder approval at the subsidiary level where the parent holds 90% or more of the voting rights in the subsidiary.
Class Shares
The new Corporations Law gives greater flexibility in terms of securities that are convertible at the option of the board of directors. For example, a KK will be able to issue bonds convertible into shares at the option of the board. This kind of convertible bond is expected to be useful in creating ‘poison pill’ style rights plans.
Cash Out Mergers, etc.
The Commercial Code currently restricts the kind of consideration that can be used in certain transactions, including mergers, stock swaps, and corporate spin-offs. Typically, these are cashless transactions. The new Corporations Law introduces more flexible rules allowing, for example, the surviving corporation in a merger to pay cash in lieu of issuing new shares to the shareholders of the disappearing corporation.
The Commercial Code also effectively excludes stock swaps between foreign corporations and Japanese corporations. Under the new Corporations Law, foreign corporations will be permitted to effect a ‘triangular merger’ under which their Japanese subsidiaries may offer shares in their foreign parent in exchange for shares in a Japanese target.
These new rules are in part the result of extensive negotiations between United States and Japanese policymakers. However, in response to concerns about the ability of Japanese corporations to defend themselves from hostile acquisitions, the government has agreed to delay introduction of this part of the new Corporations Law until 2007.
Chris Hodgens (Tokyo)
Tel: +813 5157 2763
chris.hodgens@bakernet.com
Norihiro Sekiguchi
Tel: +813 5157 2765
norihiro.sekiguchi@bakernet.com
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