Rights Offering and Amendments to the Financial Instruments and Exchange Act |
Associate Professor Yasunobu WAKABAYASHI |
On May 17, 2011, the Act for the Amendment of Parts of the Financial Instruments and Exchange Act, etc., for Strengthening the Base of the Capital Markets and Financial Industry (Act No. 49 of 2011) passed the Diet. The Act includes the following: (i) improving the disclosure system for the rights offering, (ii)expanding the range of disclosure in English, (iii)deregulation of the invest management business only for professional investors, (iv) providing flexibility in the regulations on asset securitization plans, and (v) creating rules to void transactions involving unlisted stock by unregistered broker-dealers. The following will explain section (i).The rights offering is one of equity finance methods for companies and characterized by the following two items. First, the rights offering can protect the interests of existing shareholders by allocating share options in proportion to their shareholding in the company. Second, the rights offering permits existing shareholders to avoid economic loss by giving them the chance to sell share options through the stock exchnage if they do not exercise their share options for lack of funds to purchase stocks upon the exercise of subscription rights. The Japanese corporation law has traditionally stipulated an offering method similar to the rights offering, though the method has not been adopted recently because the latter cannot be ensured. However, some recent equity finance transactions remarkably diluting the interests of existing shareholders by allocating equity securities to particular third parties was strongly criticized by institutional and foreign investors. The amendment addresses the issues related to the criticism and includes amendments to remove some obstacles to do rights offering. Specifically, the amended Act first requires disclosure of the address of EDINET (http://info.edinet-fsa.go.jp/) and of the issuer’s contact informarion via daily newspapers instead of delivering a prospectus when registering a rights offering where share options are listed (proviso of Article 13, paragraph 1 of the Financial Instruments and Exchange Act). Second, the Act regulates securities underwriters engaged in the rights offering in which they are obliged to exercise the unsubscribed share options (Article 2, paragraph 6, item3; Article 2, paragraph 8, item3; and Article 21, paragraph 4, item3, of the Financial Instruments and Exchange Act). For this “insured” rights offering (known as standby rights offering), the tender offer rules will be triggered at the exercise of share options rather than the acquisition of share options. Finally, the act stipulates decisions on the allottment of share options without contribution by the organ of the listed company as the “material fact” in the regulations for insider trading because the rights are offered by allocating share options subject to calls without contribution (Article 277 of the Companies Act) under Japanese law (Article 166, paragraph 2, item1, ho of the Financial Instruments and Exchange Act). |