Companies in civil rehabilitation proceedings no longer required to delist their securities in all cases | Practical Law

Companies in civil rehabilitation proceedings no longer required to delist their securities in all cases | Practical Law

This article is part of the PLC Global Finance July e-mail update for Japan.

Companies in civil rehabilitation proceedings no longer required to delist their securities in all cases

by Atsumi & Partners
Published on 29 Jul 2010 • Japan
This article is part of the PLC Global Finance July e-mail update for Japan.
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On 14 May 2010, PROPERST Company, a listed company on JASDAQ, an emerging stock exchange conducted by the Osaka Securities Exchange, filed a petition for civil rehabilitation proceedings without being required to delist its securities. This was a first in Japan.
Until recently, stock exchanges in Japan would delist the securities of listed companies which filled a petition for civil rehabilitation proceedings. However, on 14 May 2010, PROPERST Company (PROPERST), a listed company on JASDAQ, an emerging stock exchange conducted by the Osaka Securities Exchange (OSE), filed a petition for civil rehabilitation proceedings without being required to delist its securities. This was a first in Japan.

Why was PROPERST able to file a petition for civil rehabilitation proceedings without having its securities delisted?

First, the OSE which sets the listing requirements for JASDAQ (the exchange on which the securities of PROPERST are listed) has relaxed its listing requirements. The securities of a listed company no longer need to be delisted upon a petition for the commencement of civil rehabilitation proceedings being filed if:
  • The company, submits a rehabilitation plan to the OSE that has been approved by its creditors and which satisfies the OSE.
  • The aggregate market value of the company's securities does not fall below JPY500 million in the period of one month from the day after which the rehabilitation plan is submitted to the OSE.
Second, it appears that PROPERST had only a few creditors so it was able to persuade its creditors to agree to its rehabilitation plan.

What are the advantages of not delisting in the context of DIP Financing?

For a company entering into civil rehabilitation proceedings, the ability to maintain a listing of its securities has obvious advantages for debtor-in-possession (DIP) Financing:
  • If it becomes apparent that a company's financial condition is worsening, its customers may stop doing business with it. Delisting of the company's shares is a good (and public) indication of such worsening financial condition. By not being required to delist its securities, a company in civil rehabilitation proceedings can mitigate the damage to its business.
  • As the securities are liquid, maintaining the listing of its securities allows the company to enter into debt-equity swaps with sponsors of DIP Finance.

Will a petition for civil rehabilitation proceedings without delisting stocks become common in Japan?

PROPERST was able to file a petition for civil rehabilitation without delisting its securities because it had only a few creditors. It might be difficult for listed companies with many creditors, such as consumer loan companies, to do the same. However, if the creditors are aware of the advantages of maintaining the listing, it might be easier to persuade them to agree to the rehabilitation plan and to not delist the company's securities.