Japan Update: M&A Trend Watch [Part 1]

Stock Grant (1)

This series of M&A Trend Watches explains notable M&A topics and is intended to help readers deepen their legal knowledge of the growing number of M&A.

Introduction- Establishment of a stock grant system

The revised Companies Act, which came into effect in March 2021, introduced a new “share grant” system. The share grant system is attracting attention as a new method of M&A (hereinafter referred to as “stock consideration M&A”) that can make other companies subsidiaries in exchange for its own shares, and it may be used as a meaningful option that can use new M&A trends in Japan as compensation.

Unless other than those listed below, the article number refers to the one under the Companies Act, and the “Enforcement Regulations” refers to the Enforcement Rules of the Companies Act.

Significance of stock issuance

Under the amended Companies Act, the issuance of shares means “limited to those in which a stock company has a subsidiary (specified by a Ministry of Justice ordinance) other corporations. The same shall apply in Article 774-3, Paragraph 2. the shares of the other stock company and issue the shares of the stock company to the assignees of the shares.” (Article 2, Article 32-2). In addition, the company that issues shares is referred to as the “stock grant parent company” (Article 774-3 paragraph 1 parentheses), and the company that issues the shares that the share granting parent company receives at the time of stock issuance is referred to as the “stock granting subsidiary” (parentheses of the same paragraph).

From this definition, the share grant parent company (hereinafter referred to as the “Acquisition Company”) and the stock subsidiary (hereinafter referred to as the “Acquired Company”) which are parties to the issuance of shares are limited to corporations under Japanese law (therefore, a joint company (GK) under Japanese law can not be a party to the issuance of shares), and foreign companies are not included.

In general, “subsidiary” under the Companies Act refers to Article 2,3 of the Companies Act, “such other company, etc. when the company prescribed in the Companies Act controls the decision of the financial and business policies of other companies, etc.” (Article 3, Paragraph 1 of the Enforcement Regulations). However, it should be noted that “subsidiaries” in the definition of share issuance are limited to article 4-2 of the Enforcement Regulations, where the number of voting rights held by the acquired company in the calculation of it (including its subsidiaries) exceeds 50%, “as set forth in Article 3, Paragraph 3, Item 1”, that is, in the calculation of it. Since the issuance of shares is to be made a subsidiary, for example, it cannot be used to further acquire shares and increase the shareholding ratio of other corporations that are already subsidiaries.

Even before the revision of the Companies Act, under the Companies Act, there was a share exchange as a means of becoming a subsidiary of another company in consideration of the company’s shares, but in the share exchange, the acquired company was made a wholly owned subsidiary, and it could not be used as a means to make it a subsidiary by acquiring a majority of the shares, so it became possible in the stock granting. In addition, the Industrial Competitiveness Enhancement Act (Act No. 98 of 2013) came into effect on July 9, 2018. In the “Industry Competition Act”), stock consideration M&A can be performed while receiving exemption from in-kind investment regulations and advantageous issuance regulations based on the Companies Act, but in order to do so, there are limited situations that can be used because it is necessary to be certified as a “business reorganization plan”, and there are no such restrictions in the stock issuance system. Therefore, although an easy-to-use method has been newly established as a method of becoming a subsidiary in stock consideration M&A, the variation that can be considered as a method will expand. It is also possible to make the acquired company a wholly owned subsidiary by granting shares.

In this way, by widely allowing stock consideration M&A by the establishment of the stock grant system, M&A can be executed by the acquisition company even in M&A that requires a reasonable consideration without reducing cash on hand or borrowing large amounts of money, and from the side of the acquired company, By being a shareholder in the acquired company, you will continue to be a stakeholder in the acquisition company group, including the acquired company, and thus gain the fruits of the acquisition company group’s subsequent growth.

Procedures for granting shares – Create a share grant plan

When attempting to issue shares, the first step is that the company that issues the shares (“share grant parent company”) will create a “stock grant plan” (Article 774-2).
In this share grant plan,

• Trade name and address of the stock granting subsidiary (Article 774-3, Paragraph 1, No. 1)
• Lower limit of the number of shares of the share-granting subsidiary that the share-granting parent company will transfer up to the issuance of shares (Paragraph 2 of the same paragraph)
• Number of shares of the share-granting parent company to be delivered as consideration for the shares to the transferee of shares of the share-granting subsidiary when the share-granting parent company issues shares (Paragraph 3 of the same paragraph)
• Matters concerning allotment of shares of the share-granting parent company under Article 774-3, Paragraph 1, No. 3 to the assignees of shares of the share-granting subsidiary (Paragraph 4 of the same paragraph)
• When the share granting parent company delivers money, etc. to the transferee of shares of the share-granting subsidiary at the time of the share issuance, the contents of the money, etc. (Paragraph 5 of the same paragraph) and matters related to allotment (Paragraph 6 of the same paragraph)
• When the share-granting parent company receives stock acquisition rights, etc. of the share-granting subsidiary in conjunction with the shares of the share-granting subsidiary at the time of stock issuance, the content and number of stock acquisition rights, etc. or the method of calculating them (Paragraph 7 of the same paragraph)
• Date of application for transfer of shares of shares and stock acquisition rights, etc. of share-granting subsidiaries (Paragraph 10 of the same paragraph)
• Effective date (Paragraph 11 of the same paragraph)

Article 774-3, Paragraph 1, etc. The share granting parent company may change the effective date within three months from the effective date specified in the share grant plan (Article 816-9 Paragraphs 1 and 2).

In the issuance of shares, it is always necessary to issue shares of the share-granting parent company, but in addition to that, money, etc. can be a part of the consideration. Please note that if money, etc. is made part of the consideration, it may be subject to the creditor objection procedure of the following V. In addition, while it is necessary to include shares of the share-granting subsidiary as the acquisition target based on the stock grant, in addition to the stock acquisition right and the bond with stock acquisition right, the acquisition target can be targeted.

Since the issuance of shares is a system for a share granting subsidiary to be a subsidiary, the number of shares of the share granting subsidiary to be acquired must be 50% or more of the voting rights at the lower limit (Article 774-3, Paragraph 2).

Approval of general meeting of shareholders

Above 1. The share grant plan is pre-prepared as in reorganization under other companies act (the share grant parent company shall be prepared for a certain period prior to the effective date (“Stock Grant Plan Pre-entry Start Date”) until the date six months after the effective date, the contents of the share grant plan and certain other matters (Article 816-2) and obtain approval by a special resolution of the General Meeting of Shareholders (Article 816-3, Paragraph 1, Article 309, Paragraph 2, No. 12). In the case of a loss to the share grant parent company as a result of the issuance of shares, the director must explain to that effect at the general meeting of shareholders of the share grant parent company (Article 816-3, Paragraph 2)

In addition, as with reorganization under the Companies Act, there is also a system for granting simple shares, and in principle, approval of the general meeting of shareholders of the share granting parent company is not required if the amount of consideration issued by the share granting parent company is 20% or less of the net assets of the share granting parent company (or the ratio specified in the Articles of Incorporation) (Article 816-4, Paragraph 1).

From the application of shareholders of the share granting subsidiary to the effectiveness of the share grant

The share granting parent company will notify the person who is applying for the stock grant with the trade name of the share grant parent company and the contents of the share grant plan (Article 774-4, Paragraph 1). In response to this, shareholders of the share-granting subsidiary who are going to apply for the stock grant must issue the applicant’s name, address, etc. and the number of shares of the share-granting subsidiary to be transferred in writing by the date specified in the share grant plan (Paragraph 2 of the same Article).

The parent company of the share granting company that receives the application determines the number of shares of the share-granting parent company assigned to the person who receives the shares from the applicant (Article 774-5 Paragraph 1), and informs the Applicant of the number of shares to be transferred from the Applicant by the day before the effective date (Paragraph 2 of the same Article). In this allotment, the share granting parent company can reduce the number of shares received from the applicant from the number of applications, but since the reduction range is within the range not less than the number of lower limits specified in the stock grant plan (after paragraph 1 of the same Article), it can be said that the principle of allocation freedom within the range not below the lower limit is allowed to the share grant parent company. In addition, if the number of shares of the share granting subsidiary to be applied for the stock grant is less than the lower limit of the acquisition specified in the stock grant plan, the stock will not be issued, so we will notify the applicant without delay that the shares will not be delivered (Article 774-10).

The applicant who has been notified of Article 774-5 Paragraph 2 will become the transferor of the shares of the share-granting subsidiary in the stock grant (Article 7-7 Paragraph 1, Item 1) up with said notice, and on the effective date, the shares of the share-granting subsidiary notified by the share granting parent company will be paid to the share-granting parent company (Paragraph 2 of the same Article). The transferees of shares of the share-granting subsidiary that made the benefit will become shareholders of the share grant parent company in accordance with the rules of the share grant plan on the effective date.

However, on the effective date, the total number of shares of the share granting subsidiary transferred by the share granting parent company does not become effective if the number of shares issued by the share granting parent company is less than the number of lower limits specified in the share grant plan, or if the following creditor objection procedures have not been terminated (Article 774-11, Paragraph 5). Therefore, in these cases, the share granting parent company must return the shares of the share-granting subsidiary that received the benefit to the transferees (Paragraph 6 of the same Article).

Post-preparation

As with any reorganization under the Companies Act, the share granting parent company is required to prepare a document (or electromagnetic record of the number of shares transferred by the issuance of shares) at the head office for six months from the effective date without delay after the effective date as a post-entry procedure (Article 816-10, Paragraphs 1, 2).

Inso of shareholders of the share grant parent company and the right to request share purchases of opposing shareholders

In the event that the issuance of shares violates laws and regulations or the Articles of Incorporation, if the shareholders of the share granting parent company are likely to be against, the shareholders of the share grant parent company may request the stock grant parent company to in injunction on the issuance of shares (Article 816-5).

In addition, the right of the opposite shareholder to claim the share purchase is also permitted, and the opposing shareholder of the share grant parent company may request the shares of the share grant parent company to be bought at a fair price (Article 816-6).

In addition, any of the above is not available in the case of simple stock issuance (Article 816-5, Article 816-6)

Creditor’s Statement of Objection Procedure

In the case where the consideration for the issuance of shares includes money, etc. other than the shares of the share grant parent company, and the total amount is less than 5% of the total amount of consideration including the shares of the share grant parent company (Article 213-7 of the Enforcement Regulations), the creditor of the share grant parent company may object to the issuance of shares to the share grant parent company (Article 816, Paragraph 8, Paragraph 1). In that case, the share granting parent company will file the same creditor opposition procedures as in reorganization under other Companies Act, such as public notices and notices to known creditors (Paragraphs 2 to 5 of the same Article).

Share granting subsidiary

As mentioned above, the stock grant system established this time has various disciplines regarding the share grant parent company, but there is no particular discipline such as provision of information and institutional decisions as measures to be taken by the share granting subsidiary.
This is due to the fact that the share granting parent company does not naturally acquire shares of the share granting subsidiary by law, but in effect the shares of the share granting subsidiary will be transferred based on a relative individual agreement, and the conditions of the transfer are also agreed between the assigner and the assignees without the involvement of the share granting subsidiary, so there is no need to establish such discipline. Shareholders of share-granting subsidiaries are not allowed the right to claim share purchases of opposing shareholders. In addition, when the shares of the share-granting subsidiary are restricted shares, the transfer approval procedure is not required.

A Business & Law Publication

By Shigemoto Tatsuno, Anderson Mori Tomotsune, Japan, a Transatlantic Law International Affiliated Firm. 

For further information or for any assistance please contact japan@transatlanticlaw.com

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