In our penultimate blog on shareholder activism in Japan, we give a brief overview of the key Japanese laws governing activism.
The Japanese laws relevant to shareholder activism are extensive. The following seeks to summarize the key points:
- As with other jurisdictions such as the UK, shareholder activists are not generally subject to stringent regulations or disclosure requirements as long as their stakes are within the relevant regulatory thresholds (summarized in the table below). The percentage threshold for disclosure requirements ("possession of a large volume of shares") for example is 5 percent (i.e. larger than, say, the 3 percent threshold in the UK, but commensurate with the United States). Activists usually go below this threshold through a combination of "secret purchases" (i.e. below the threshold so that the acquisitions are unknown to the company) and the use of equity derivatives that are not required to be counted towards their holdings.
- Unlike other jurisdictions where shareholders cannot give instructions to the management of a stock corporation but are confined to appointing (supervisory/non-executive) board members who in turn cannot give instructions either, shareholders in Japan have much more power. For example, directors are appointed and dismissed by a resolution of shareholders and (subject to the articles of incorporation), shareholders can make significant business decisions at shareholders' meetings that would bind the board. This may, theoretically, include withdrawing from a certain type of business, although we are not aware of any such examples.
- Under the recently amended Foreign Exchange and Foreign Trade Act, any foreign investor contemplating an acquisition of 1 percent or more of the shares or voting rights of a Japanese listed company engaged in "sensitive sectors" (e.g. wholly regulated – weapons, aircraft, nuclear facilities, space, and dual-use technologies; and partially regulated – cyber security, electricity, gas, telecommunications, water supply, rail and oil) will have to notify the Bank of Japan prior to making the investment (i.e. it is a suspensory regime) unless exemption rules apply.
The following table summarizes the key rights and obligations of shareholders at the various levels of shareholding typically exceeded (depending on the scenario) by activist shareholders.
Having 1% or more voting rights, or 300 or more voting rights, consecutively for the preceding six-month (or more) period prior to the proposal (unless otherwise stated in the articles of incorporation)
Articles 303 and 305 CA
Ability to propose a matter to be discussed at a general shareholders meeting and to request directors to notify other shareholders by sending a summary of shareholder proposals (subject to restrictions)
No specific threshold
Article 125(2-3) CA
Right to request access to inspect or copy shareholder registry (subject to restrictions)
No specific threshold
Article 371(2) CA
Right to request access to inspect or copy minutes of board of directors meetings
1% or more of shares or voting rights in a Japanese listed company engaged in a "sensitive sector" (e.g. weapons, aircraft, nuclear facilities, electricity, gas)
Foreign Exchange and Foreign Trade Act
Notification required to Bank of Japan prior to investment, unless an exemption applies
3% or more of all voting rights or 3% or more of outstanding shares (unless otherwise stated in the articles of incorporation)
Article 433 CA
Right to request access to inspect or copy accounting books (subject to restrictions)
Having 3% or more of all voting rights consecutively for the six-month (or more) period immediately preceding the proposal to call an extraordinary shareholders meeting (unless otherwise stated in the articles of incorporation)
Article 297 CA
Ability to call an extraordinary shareholders meeting
More than 5% shareholder ratio (and any subsequent increase or decrease of 1% or more from the previous reporting)
Article 27-23 FIE Act
Large-scale shareholding report – shareholder required to file report re. "possession of a large volume of shares"
- Any person who intends to solicit a proxy regarding shares in a listed company must deliver to the person solicited a proxy form and reference documents containing information specified in the Cabinet Office Ordinance (i.e. regulations relating to proxies).
- The information does not have to be provided if the same information is disclosed in the reference documents that are typically enclosed with the convocation notice of a shareholders meeting where proxies are solicited.
- The solicitation may be exempt from proxy regulations if made by persons other than the company or the officers (including directors and executive officers) and if the persons are fewer than 10.
- A company soliciting proxies by, for example, offering certain economic benefits to shareholders to facilitate favorable voting results may violate regulations on giving benefits under the CA Article 120(1).
- Social media platforms (e.g. Twitter and LinkedIn) are not commonly used as communication tools during campaigns between targeted companies and activists.
For those who wish to continue reading, the consolidated version of all four blog posts is available in the attached/linked PDF.