Equity capital markets in Japan: regulatory overview
A Q&A guide to equity capital markets law in Japan.
The Q&A gives an overview of main equity markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, marketing, bookbuilding, underwriting, timetables, stabilisation, tax, continuing obligations and de-listing.
To compare answers across multiple jurisdictions visit the Equity Capital Markets Country Q&A tool.
This Q&A is part of the global guide to equity capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/equitycapitalmarkets-guide.
Main equity markets/exchanges
Main equity markets/exchanges
The main equity market in Japan is the Tokyo Stock Exchange (TSE) (www.jpx.co.jp/english), one of the oldest stock exchanges in the world, established in 1878. The TSE offers three markets:
The first section (for blue-chip companies with high liquidity) on the main board (First Section).
The second section (for well-established medium-sized companies) on the main board (Second Section).
Mothers (for emerging companies).
In addition to these markets, the TSE manages JASDAQ (for emerging companies), which was previously managed by the Osaka Securities Exchange, from July 2013. JASDAQ offers two markets:
The TSE also offers the TOKYO PRO Market, a market exclusively for professional investors established in June 2009. Listing and continuous disclosure requirements are less burdensome, as compared to the other markets; however, the number of listed companies is limited and this market is not active.
As of 29 February 2016, nine foreign companies were listed on the TSE. As of 29 February 2016, the TSE's total market capitalisation exceeded JPY497,814 billion, making the TSE one of the largest exchanges in the world.
Market activity and deals
There was an increase in initial public offering (IPO) activity in 2015 compared to 2014 (there were 89 issues in 2015, up from 75 issues in 2014). JAPAN POST HOLDINGS Co, Ltd (JPH) and its subsidiaries, JAPAN POST BANK Co, Ltd (JPB) and JAPAN POST INSURANCE Co, Ltd (JPI), made concurrent global IPOs and listed their shares on the TSE on 4 November 2015. In connection with the listing of shares of JPH on the TSE, the Minister of Finance of Japan, acting as representative of the Government of Japan, offered and sold JPH shares in and outside Japan (in accordance with Regulation S and Rule 144A). Concurrently, in connection with the listings of shares of JPB and JPI on the Tokyo Stock Exchange, JPH offered and sold those shares in and outside Japan (in accordance with Regulation S and Rule 144A). This transaction was the largest IPO in Japan conducted during 2015, with a total market capitalisation of JPH, JPB and JPI after the IPO of over JPY17 trillion. In addition, we believe that triple listings of parent and subsidiaries are unprecedented in Japan and even globally.
Listing applications to the TSE are generally not publicly disclosed by applicants until listing approval. IPO activity can be postponed during the course of the listing examination for various reasons, including the applicant's business results and economic conditions, in which case the TSE will suspend its examination at the applicant's request. The TSE does not publicly disclose the number of postponements, or the names of the applicants where the IPO activity has been postponed.
The Financial Services Agency of Japan (FSA) is the regulator responsible for Japan's equity markets. The main role is taken by the FSA's relevant local finance bureau. The TSE also regulates the equity markets and has adopted rules applicable to listed companies (see Question 1).
The legislation principally governing the equity markets is the Financial Instruments and Exchange Act of Japan (FIEA) (Act No 25 of 1948, as amended).
For a primary listing on the TSE, the applicant must satisfy:
Quantitative criteria, including the:
number of shareholders;
number of tradable shares, that is, listed shares excluding: treasury shares; shares held by parties with special interests (for example, company officers); and shares held by large shareholders (individually owning 10% or more).
market capitalisation of listed shares;
amount of profit.
Qualitative criteria, including:
corporate continuity and profitability;
sound corporate management;
effective corporate governance and internal control systems;
appropriate disclosure of corporate information;
other items that the TSE deems necessary in the light of public interest and investor protection.
There is no major difference between the listing criteria for domestic and foreign applicants.
For listing on Mothers, there is no criterion for financial performance, such as amount of profit. The TSE, however, requires Mothers-listed companies to hold corporate information sessions at least twice a year. In addition, the TSE requires JASDAQ Growth-listed companies to hold sessions with respect to their mid-term management plans at least once a year.
There is no working capital requirement for listing on the TSE. To be listed on the Second and First Sections, however, the applicant's expected consolidated shareholders' equity as of the listing date must be at least JPY1 billion. To be listed on JASDAQ Standard, the applicant's expected consolidated shareholders' equity as of the listing date must be at least JPY0.2 billion. To be listed on JASDAQ Growth, the applicant's expected consolidated shareholders' equity as of the listing date must be more than zero.
Minimum size requirements
To be listed on the TSE's markets, the minimum expected market capitalisation of the company's tradable shares as of the date of listing must be:
Mothers: JPY0.5 billion.
Second Section: JPY1 billion.
First Section: JPY1 billion.
JASDAQ Standard: JPY0.5 billion.
JASDAQ Growth: JPY0.5 billion.
For a transfer from Mothers or the Second Section to the First Section, however, the expected market capitalisation of the company's tradable shares must be at least JPY1 billion. For a transfer from JASDAQ Standard or JASDAQ Growth to the First Section, the expected market capitalisation of the company's tradable shares must be at least JPY1 billion.
In addition, the expected market capitalisation of listed shares as of the listing date must be at least:
Mothers: JPY1 billion.
Second Section: JPY2 billion.
First Section: JPY25 billion.
JASDAQ Standard: Not applicable.
JASDAQ Growth: Not applicable.
For a transfer from Mothers or the Second Section to the First Section, however, the expected market capitalisation must be at least JPY4 billion. For a transfer from JASDAQ Standard or JASDAQ Growth to the First Section, the expected market capitalisation must be at least JPY25 billion.
Trading record and accounts
Generally, an applicant company must have:
Maintained disclosure documents with no false descriptions for the last two financial years.
Received from its auditors unqualified opinions or qualified opinions with exceptions on the annual financial statements for its two most recent complete financial years.
Received an unqualified opinion from its auditors on the annual financial statement and quarterly financial statements for its most recent complete financial year.
Minimum shares in public hands
To be listed on the TSE, the number of tradable shares must be a minimum of:
Mothers: 2,000 trading units.
Second Section: 4,000 trading units.
First Section: 20,000 trading units.
The following percentages of listed shares must be tradable:
Second Section: 30%.
First Section: 35%.
For listing on JASDAQ Standard and JASDAQ Growth, minimum shares requirements are as follows, either:
The number of tradable shares must be a minimum of 1,000 trading units.
10% of listed shares must be tradable.
With regards to a secondary listing, the TSE provides almost the same criteria as for a primary listing, although some of the requirements that apply to a primary listing do not apply to a secondary listing. For example, the following requirements do not apply to a secondary listing of foreign companies (see Question 3):
Market capitalisation of tradable shares.
Percentages of tradable shares.
IPOs are typically structured as:
Public offerings of new shares.
Public offerings of existing shares (typically by large shareholders).
A combination of both.
These offerings are typically effected through allocation of shares to institutional investors as well as retail investors, especially in the case of larger offerings. An issuer may raise funds through the public offering of new shares. However, this will, of course, result in the dilution of existing shares. The public offering of existing shares, by contrast, will not result in the dilution of existing shares. However, the proceeds of that offering will accrue to the shareholders rather than the issuer itself.
Subsequent equity offerings are also structured as public offerings of new shares, public offerings of existing shares (typically by large shareholders) or a combination of both. However, third-party allotment (that is, the issue of new shares to a limited number of specified investors) is also common. The regulations that apply to public offerings and third-party allotments are basically the same, but the regulations for third-party allotments require more detailed information regarding investors.
Historically, rights offerings have not been common in Japan, in part because they have required longer preparation periods and more cumbersome procedures than other mechanisms. However, an amendment to the FIEA in May 2011 and an amendment to the related regulations in November 2011 (2011 Amendments) were intended to facilitate use of rights offerings.
Under the 2011 Amendments, issuers have been released in certain conditions from the obligation to deliver prospectuses to existing shareholders and certain other existing issues have been clarified. In addition, the 2011 Amendments facilitated commitment-type rights offerings, in which an underwriter securities company makes a firm commitment to acquire all unexercised stock acquisition rights. The underwriter then exercises those acquired stock acquisition rights and sells the resulting shares in the secondary market.
More specifically, persons who acquire equity securities of a listed company (for example, shares or stock acquisition rights) exceeding a certain shareholding ratio are subject to Japan's takeover bid regulations and must file large shareholding reports. However, underwriters in commitment-type rights offerings may acquire and hold a considerable number of unexercised stock acquisition rights and may therefore become subject to these takeover bid regulations and large shareholding reporting requirements. Since the 2011 Amendments became effective, underwriters have been allowed to exclude these stock acquisition rights when calculating their shareholding ratios under Japan's takeover bid regulations and the large shareholding reporting requirement, if certain conditions are met. Since the implementation of the 2011 Amendments, the number of companies conducting rights offerings has gradually increased.
One of the advantages of rights offerings is that, unlike the offering of shares or third-party allotments, they enable companies to raise funds without diluting existing shareholders' rights. However, as discussed above (see Question 6), rights offering precedents are not as numerous as precedents for offerings of shares or third-party allotments. Although certain problems and issues regarding rights offerings have been solved by the 2011 Amendments, additional issues still remain to be solved.
Unlike share offerings, in which the final conditions of offering (for example, the offering price) are fixed after book building, in the case of rights offerings final conditions are generally fixed at the same time as the adoption of the resolution approving the relevant rights offering. It is therefore necessary for issuers to contact their large shareholders and confirm whether or not they intend to exercise stock acquisition rights before the relevant securities registration statement is filed, because in the case of commitment-type rights offerings, the intention of those large shareholders significantly affects the calculation of the number of unexercised stock acquisition rights which will be acquired and exercised by the underwriters. In the case of non-commitment type rights offerings, the issuers will not be able to receive sufficient proceeds if the large shareholders do not exercise the stock acquisition rights allotted to them.
Such a contract has been problematic in the past, because rights offerings are conducted by way of gratis allotment of stock acquisition rights, which will constitute public offerings under the FIEA. Solicitation directed to potential investors prior to the filing of a securities registration statement is accordingly prohibited. However, the term "solicitation" is not expressly defined under the FIEA and relevant regulations, with the result that the permitted scope of communications between an issuer and its shareholder is unclear. Any contact between issuers and shareholders prior to the filing of a securities registration statement must be conducted with appropriate care and in accordance with qualified legal advice.
In August 2014, the relevant guidelines under the FIEA were amended to provide that issuers are permitted in certain circumstances to engage in limited, necessary communications with investors (including publication of certain corporate information) prior to the filing of securities registration statements. By way of example, the amended guidelines list several types of communications that are permitted prior to the filing of securities registration statements. Among these, the amended guidelines provide that surveys of demand among large shareholders or professional investors conducted in order to make go or no-go decisions are permitted, provided that companies take certain measures, such as preventing leakage of information regarding the contemplated offering to other persons. In the case of rights offerings, contact by an issuer with its large shareholders is now permitted prior to the filing of a securities registration statement if certain conditions are met.
Unlike share offerings, in which an issuer may select the jurisdiction for that offering, in the case of rights offerings the regulations of any jurisdiction in which the shareholders are located may apply. If US securities law and regulations are applicable, this may discourage the relevant offering due to the time and expense of US registration and subsequent continuous disclosure requirements, as well as the US litigation risk. Rights offerings in Europe often do not allow shareholders in the US to exercise the relevant rights in order to avoid US registration requirements, and there has been discussion as to whether the same treatment is possible under Japanese law. It has been argued that any such treatment in Japan might constitute an infringement of the principle of shareholder equality, which has been adopted under Japanese judicial precedent. However, an FSA working group pointed out that such treatment might not constitute infringement of this principle, if such treatment is necessary for the smooth conduct of rights offerings and if the restriction of the rights of shareholders in the US is reasonable. A majority of Japanese rights offering precedents to date have included prohibitions on exercise by US shareholders, suggesting that the relevant market participants have taken the same view as espoused by the working group.
Procedure for a primary listing
The main steps in applying for a primary listing include:
The applicant obtains a board resolution authorising the listing application.
The applicant submits the listing application and company documents to the TSE.
The TSE conducts a listing examination.
The applicant and advisers involved conduct a due diligence procedure for public offering.
The applicant finalises the offering documents such as the:
securities registration statement; and
The TSE approves the listing.
The applicant files the securities registration statement.
The applicant, with the advice of investment banks, engages in marketing the IPO and bookbuilding.
The applicant, with the advice of investment banks, prices and allocates the shares.
Admission to listing and closing.
Procedure for a foreign company
The procedure is the same for foreign companies (see above, Procedure for a primary listing).
Advisers: equity offering
The following are key advisers commonly used in an equity offering and in an IPO:
Investment bank. The issuer appoints a lead investment bank which is a TSE participant. The bank provides advice to the issuer, manages the offering procedure and co-ordinates the applicant's other advisers. Generally, the bank assumes various roles, including:
Financial adviser. The bank provides advice on the timing of the equity offering, offering structure, valuation, pricing and marketing strategy. In addition, especially in the case of IPOs, it often provides advice on the issuer's corporate governance, compliance issues and future capital structure, including the relationship with large shareholders. The bank must in the case of an IPO submit a listing recommendation letter to the TSE.
Underwriter. The bank underwrites (alone or together with other syndicate members) the securities to be offered.
Bookrunner. The bank maintains the book of demand for the offered securities;
Global co-ordinator. The bank provides advice on the equity offering in general and co-ordinates on a global basis where there are offerings in other markets.
Stabilising manager. Stabilisation is generally prohibited. However, certain stabilisation activities are permitted to facilitate a smooth offering, and the bank often acts as a stabilising manager (see Question 19).
Lawyers. The issuer, underwriters and selling shareholders often appoint lawyers to advise them on legal matters arising in connection with the equity offering and listing, including conduct of due diligence and preparation of prospectus and other offering documents. After listing, the issuer's lawyer often undertakes the issuer's post-listing activities, such as ongoing corporate disclosure.
Audit corporation. An audit corporation is appointed to:
analyse the issuer's financial statements and description in the securities registration statement and prospectus;
provide comfort letters;
provide a report for the securities registration statement and prospectus.
Trust bank. The trust bank acts as the issuer's transfer agent and, among others:
handles the settlement and transfer of shares;
is responsible for issuing Japanese depository receipts.
Receiving bank. A receiving bank is, generally, necessary for settlement.
The following are the main documents produced in an equity offering and in an IPO:
The securities registration statement and prospectus (see Question 10).
Various agreements, including the underwriting agreement and the agreement between managers.
The listing application to be submitted to the TSE and other related documents, including, in the case of an IPO, the recommendation letter from an investment bank (see above).
Equity prospectus/main offering document
A securities registration statement must be filed with the local finance bureau for public inspection through the Electronic Disclosure for Investors' NETwork (EDINET) (an electronic disclosure system operated by the FSA) before the start of a public offering of securities in Japan. In addition, a prospectus (the content of which is almost identical to the securities registration statement) is generally required for any offering of securities to the public in Japan and must be delivered to investors on or before the sale of the securities.
Previously, under the FIEA and related regulations, securities registration statements were required to be prepared in Japanese. Since the 2011 Amendments (see Question 6) became effective, however, foreign companies in some cases may be permitted to file securities registration statements in English, although these must be accompanied by certain supplementary documents in Japanese. (For English continuous disclosure requirements, see Question 21.)
A prospectus is not required:
Where a securities registration statement is not required because the offering does not constitute a public offering of new shares or a public offering of existing shares. Any offering of listed equity securities, even to a single person, will generally constitute a public offering.
The offering is addressed to:
a qualified institutional investor;
a person who already owns the same securities or has or is likely to have a prospectus and who agrees that the prospectus need not be delivered.
Foreign issuers can utilise the exemptions above.
The content requirements for a prospectus vary according to the nature and circumstances of the issuer and securities. Generally, the requirements are almost identical to those imposed for the securities registration statement.
The form of the securities registration statement is prescribed by regulation passed under the FIEA. The primary information required in the form is as follows.
Information concerning securities
Information required for public offering of new shares or existing shares includes the:
Type of shares (for example, common or preferred shares).
Number of shares offered.
Offer price and issue price (that is, selling price).
Offering structure (for example, public offering and third-party allotment) and total issue price for each component.
Name and address of selling shareholders.
Subscription period and place of subscription.
Date of payment and place of payment.
Name and address of underwriters and number of shares to be underwritten.
Total amount and use of proceeds.
Additional information required for third-party allotment includes:
Purchaser information, for example:
name and address;
relationship with issuer;
method and reasons for selection;
number of shares to be purchased;
shareholding policy; and
confirmation by the issuer of the existence of assets to be used in payment.
Transfer restrictions to be imposed on the purchaser (if any).
Pricing information (for example, basis and justification of pricing).
Information concerning any extensive third-party allotment (for example, if a purchaser will acquire a substantial majority voting interest through the offering, the issuer's justification for that offering).
List of large shareholders following the offering.
Possibility of future squeeze-out.
Information concerning the issuer and its corporate group
The following information is provided:
An overview of the issuer and its corporate group, including:
trends in major business indices concerning the issuer and its corporate group;
the nature of their business;
their affiliated companies; and
The issuer and its corporate group's business, including:
an outline of the results of their operations;
the state of their production, orders accepted and sales;
problems to be resolved;
research and development activities; and
an analysis of their financial condition, operating results and cash flows.
The facilities of the issuer and its corporate group, including:
an outline of capital investment;
a description of the state of major facilities;
any plans for installation and retirement of facilities.
Information concerning the applicant's:
state of shares, including: the number of authorised and issued shares, and the list of the large shareholders.
trends in stock prices;
directors and officers; and
The issuer and its corporate group's financial condition, including:
events subsequent to the financial statements; and
differences in accounting principles and practices between the issuer's home country and Japan (if the issuer is a foreign company).
A summary of the filing company's share-handling services in Japan.
Other reference information.
In connection with financial statements, issuers which are already subject to continuous disclosure requirements in Japan at the time of filing of a securities registration statement must include in that securities registration statement only audited financial statements for the two most recently completed fiscal years. For issuers not already subject to continuous disclosure requirements in Japan at the time of filing (that is, issuers filing a securities registration statement in Japan for the first time), audited financial statements for one additional fiscal year (only in case of foreign companies) or unaudited financial statements for three additional fiscal years must also be included (with the choice between these alternatives at the issuer's discretion). In August 2014, the applicable regulations were amended, and the revised regulations provide that Japanese companies conducting IPOs are required to disclose complete financial statements for only two fiscal years, although the requirement to provide non-consolidated financial highlights for five fiscal years remains in force (see Question 26). In addition, if a securities registration statement is filed after a certain period has passed since the beginning of the current fiscal year, financial statements for the fiscal quarter or half must also be included in the securities registration statement.
As to accounting standards, Japanese issuers are required to prepare their financial statements in accordance with either:
Relevant rules under the FIEA and Japanese generally accepted accounting principles.
The International Financial Reporting Standards.
In the case of foreign issuers filing securities registration statements, filing of financial statements prepared in accordance with generally accepted accounting principles in other jurisdictions may be permitted, although this requires the prior approval of the FSA.
An issuer which has complied with continuous disclosure requirements under the FIEA for one year can use a simplified form of securities registration statement and prospectus. Under this form the issuer only needs to physically include the following documents:
Its latest annual securities report.
A quarterly securities report and extraordinary reports filed after the filing of the latest annual securities report.
Any amendments to the reports.
In addition, issuers that satisfy certain additional requirements can also use a simplified form in which they can incorporate the above reports by reference. Examples of such issuers are listed companies which, in addition to having complied with continuous disclosure requirements under the FIEA for one year, have:
A trading volume and market capitalisation which are both JPY10 billion or more.
Market capitalisation which is JPY25 billion or more.
The securities registration statement and prospectus are prepared by the issuer with input from other advisers (see Question 9). In particular, the business section (especially the description as to the issuer's business strategy) is often prepared in consultation with issuer's legal counsel and participating investment bank(s). Typically, a draft securities registration statement and prospectus are subject to review and comment by the advisers, and documentation meetings are held for discussion.
The local finance bureau also reviews the content of the securities registration statement in the course of preparation for filing, and its comments (if any) must be reflected in the statement and the prospectus. In the case of an IPO, comments from the TSE on the listing materials (a part of which consists of the same information as contained in the prospectus) must also be reflected.
The following persons have statutory liability for the securities registration statement:
Senior management of the issuer (for example, directors and executive officers).
The following penalties may be imposed if a securities registration statement contains any incorrect or misleading information:
Criminal penalties (imprisonment and fines).
Surcharges (surcharges may be imposed by the Commissioner of the FSA as an administrative sanction, as opposed to fines, which are levied by the courts as punishment).
Civil liabilities (for example, a company which included incorrect or misleading information in a securities registration statement may be liable for damages to investors who incur losses arising from purchasing that company's securities).
In addition, the issuer and persons using the prospectus for offering have statutory liability for the prospectus in an equity offering. Auditors and underwriters may also be liable for the contents of the prospectus.
Marketing equity offerings
After the filing of the securities registration statement, the issuer and advisers (mainly the participating investment bank(s)) start marketing through:
Road shows. These are normal marketing presentations that the issuer's senior management makes to selected audiences (usually institutional investors) with assistance from the participating investment bank(s).
Meetings. These are one-on-one meetings with key institutional investors to promote better understanding of the issuer.
Other advertisement. Advertisement methods vary depending on the target. Typical examples include:
newspaper advertising; and
term sheet mailings.
Advertising materials can be deemed to constitute offering materials to prospective purchasers and can be subject to statutory liability. The legal counsel of both the issuer and the underwriters generally carefully review the contents of advertising materials.
Under previously existing regulations, there was no safe harbour rule with respect to gun-jumping (that is, no regulation permitting issuers and/or underwriters to solicit purchase of shares before the filing of a securities registration statement), and accordingly there generally was no pre-marketing in Japan. As mentioned in Question 7, however, amended guidelines now permit surveys of demand among large shareholders or professional investors conducted in order to make go or no-go decisions, under limited conditions.
Liability can arise for a broker or dealer as a result of the following:
Market manipulation. Market manipulation rules prohibit any person from providing false or misleading information for the purpose of inducing purchase of securities (Article 159, paragraph 2(3), FIEA).
Use of misleading information in public offerings. This rule prohibits any person from providing false or misleading information in any document (or electronic media) used in connection with a public offering of securities. Research reports published by participating securities entities in proximity to the offering can be deemed to constitute offering materials and can be subject to this restriction (Article 13, paragraph 5, FIEA).
Insider trading. Any person who has received undisclosed material information from a corporate insider is prohibited from selling or purchasing listed shares before that material information is publicised (Article 166, paragraph 3, FIEA).
Methods of minimising potential liability include:
Disclosure and disclaimer. Under the internal rules of the Japan Securities Dealers Association (JSDA), brokers or dealers must disclose conflicts of interest in any research reports published in respect of a particular issuer. In addition, any securities firm which acts as a lead underwriter for an offering of a particular issuer must disclose its role in all research reports concerning the shares of that issuer published within one year following the offering.
Information barriers. Research analysts are prohibited from participating in pitches to potential issuers by underwriting or investment banking departments.
Research blackout period. There is no specific legal requirement for a blackout period (that is, a period during which no research information will be distributed by investment banks participating in the underwriting) preceding the start of offerings of securities. However, investment banks generally have internal blackout guidelines. A typical period is approximately two weeks.
Bookbuilding is used in almost all public offerings of equity securities. The offering price is fixed once an indication of demand has been received from potential investors (mainly institutional investors) following presentation of price range and circulation of a prospectus. The price range is determined taking into consideration the:
Operating results and financial condition.
Comparison with competitors.
Opinions of institutional investors which have established high reputations for valuation of shares.
When shares are offered to retail investors, solicitation of the retail investors takes place concurrently with institutional investors after the securities registration statement is filed.
Investors' orders are placed and confirmed in the subscription period following the pricing. Investors can withdraw or change indications of demand provided during the bookbuilding period, but once orders are placed and confirmed during the subscription period they cannot be withdrawn or changed. Investors are generally required to pay application money (equivalent to the aggregate purchase price) when placing an order, and this is applied to the purchase at closing.
Underwriting: equity offering
Equity offerings in Japan are typically fully underwritten, with the underwriters contracting with the issuer or selling shareholder(s) to purchase all shares to be offered, even if not all of the shares can be sold on to investors.
The terms of the underwriting are set out in an underwriting agreement, which often includes an over-allotment option for underwriters. Lock-up arrangements between the issuer and selling shareholder(s) are also often included, and underwriters also often request other large shareholders to execute separate lock-up letters. The underwriters' obligations are subject to a number of conditions, such as:
Listing of the shares.
Receipt of appropriate legal opinions.
Observance of selling restrictions.
The issuer must provide a number of representations and warranties to the underwriters, breach of which will entitle the underwriters to terminate the underwriting agreement. Underwriting agreements also typically contain broad indemnity provisions in favour of the underwriters.
The underwriting fees are also set out in the underwriting agreement, and are typically spread between the offer price and issue price (or selling price in the case of a secondary distribution). The amount of the underwriting fees will vary, depending on the issuer and overall market conditions, but in recent cases they typically range from 3% to 8% of the offer price.
Timetable: equity offerings
The following is a summary timetable for a typical equity offering and a typical IPO in Japan where "X" is the date of pricing.
Typical equity offering
The timetable is as follows:
X minus 3 months. The advisers are appointed.
X minus 2 months. The applicant and advisers begin preparation of key offering documents.
X minus 10 days. The launch date, that is, the filing of the securities registration statement and commencement of offering.
X. The pricing date.
X plus 1 week. Closing.
The timetable is as follows:
X minus 1 year to 6 months. The working parties are appointed.
X minus 5 months. Begin preparation of key documents.
X minus 4 months. File listing application with the TSE.
X minus 1 month. Launch date, that is, approval for the TSE listing; filing of securities registration statement and commencement of offering.
X minus 1 week. The start of bookbuilding.
X. The pricing date.
X plus 1 week. Listing on the TSE and closing.
Stabilisation is generally prohibited as it breaches rules on market manipulation under the FIEA. Stabilisation to facilitate equity offerings, however, is permitted under certain conditions, because those offerings can cause drastic changes in the market price of the relevant securities due to temporary imbalance of supply and demand.
Common requirements for stabilisation under the FIEA are as follows:
Stabilising manager. In general, the underwriter can conduct stabilisation.
Persons that can request stabilisation. These persons are limited to certain parties, such as issuer's senior management and selling shareholders.
Disclosure. The possibility of stabilisation and the market in which stabilisation is expected to take place must be disclosed in the prospectus. In addition, a filing with the local finance bureau is required on the commencement of stabilisation and the results of this must be reported to the local finance bureau. Copies of the filings and reports must also be sent to the TSE.
Stabilisation period. The stabilisation period, if any, generally starts on the day following the pricing date and continues through to the last day of the application period for investors.
Stabilisation price. The maximum price permitted for stabilisation purchases is the lower of the closing prices on the days immediately preceding the commencement of:
the stabilisation period; and
actual stabilisation purchases.
Tax: equity issues
A number of tax issues can apply. Capital gains derived from the sale of equity securities of foreign companies by a non-resident shareholder that has no permanent establishment in Japan are not generally subject to Japanese income tax or corporation tax.
Capital gains derived from the sale of equity securities of Japanese companies by a non-resident shareholder that has no permanent establishment in Japan, who is a portfolio investor, are not generally subject to Japanese income tax or corporation tax. Capital gains derived from the sale of equity securities of a Japanese company by a certain large non-resident shareholder, however, are generally subject to Japanese income tax or corporation tax. Therefore, such large shareholders who are planning to sell shares in an IPO should seek specialist tax advice to minimise tax liability.
It should be noted that the descriptions are not exhaustive, and an issuer should ask for specialist tax advice to discuss any tax issues specific to its offering.
Disclosure requirements under the FIEA
A company listed on the TSE must file with the local finance bureau (through EDINET):
Annual securities reports. The company must file annual securities reports within three months (six months in the case of foreign companies) after the end of each financial year disclosing the business and financial results of the company and its corporate group.
Quarterly securities reports. A company which is required to file annual securities reports and which has a financial year of more than three months in length will also be required to file quarterly securities reports within 45 days after the end of each quarter disclosing business and financial results of the company and its corporate group.
Extraordinary reports. A company which is required to file annual securities reports will also be required to file extraordinary reports without delay to disclose important decisions and events that may significantly affect business and financial results.
These documents must be prepared in Japanese in compliance with the forms prescribed under the FIEA. However, foreign issuers may file foreign issuer reports prepared in English rather than preparing these documents in compliance with the forms prescribed under the FIEA. Summary and other explanatory materials prepared in Japanese must accompany foreign issuer reports. In addition, the filing deadline is shortened to four months in the case of annual foreign issuer reports.
Companies that are not listed on any stock exchange in Japan are exempted from continuous disclosure requirements in either of the following cases, subject to the approval of the FSA:
The number of investors in Japan who own securities issued by the company was less than 25 as of the end of its most recent fiscal year.
The number of shareholders of the company in Japan was less than 300 as of the end of each of its five most recent fiscal years. If a company has publicly offered any type of securities, such as bonds, in Japan in addition to shares, that company is subject to disclosure obligations for both its shares and other securities. In this case, it needs to qualify for exemption under both this point (for shares) and the point above (for other securities) and is subject to FSA approval.
The exemption set out in the second bullet point above applied only to Japanese companies until an amendment to the relevant regulation under the FIEA was adopted in August 2013 expanding this exemption to include foreign companies.
Disclosure requirements under the TSE rules
In addition to the disclosure requirements under the FIEA, companies listed on the TSE must issue press releases through Timely Disclosure Network (TDnet), the TSE's online disclosure system, concerning important decisions and events of the company and its corporate group. These include:
Information concerning decisions, such as:
issues of new shares;
stock splits or reverse stock splits;
commencement of tender offers by the company in respect of another company.
Information concerning events, such as:
changes in major shareholders;
changes in auditors;
commencement of tender offer by another company in respect of the company's shares;
lawsuits and court rulings;
damage caused by disasters.
Information concerning financial results and forecasts, such as:
publication of financial results and related adjustments;
business and dividend forecasts.
Other information, such as information regarding subsidiaries.
The continuing disclosure requirements apply to foreign companies if their shares or depositary receipts are listed. However, the forms for disclosure documents for domestic and foreign companies differ slightly. For example, a foreign company must disclose in its annual securities report summary information regarding the corporate laws and regulations of its home jurisdiction.
The following penalties can be imposed for breach of the continuing disclosure obligations under the FIEA:
Criminal penalties (imprisonment and fines).
Civil liabilities (for example, a company which includes incorrect or misleading information in an annual securities report can be liable for damages to investors who incur losses arising from purchase of that company's shares).
The following penalties can be imposed for breach of the TSE's rules:
Orders to submit reports to the TSE detailing the history of breach and planned remediating action.
Publication by the TSE of the fact that the company has been designated as a company cautioned regarding disclosure.
De-listing (see Question 25).
Market abuse and insider dealing
Restrictions on market abuse/insider dealing
The FIEA restricts various transactions which may distort the fairness of capital markets. These restrictions are roughly categorised as either insider trading or market manipulation. Insider trading includes the following:
Insider trading. Any person having a special relationship with a company (typically, an officer, agent, employee or large shareholder (a shareholder owning 10% or more of a company's issued shares)) (insiders) is prohibited from purchasing or selling shares of that company while in possession of material undisclosed information regarding it, until that information has been published. The same applies to any person who has received undisclosed material information from an insider.
Previously under the FIEA, mere conveyance of material undisclosed information to others was not prohibited. It was pointed out, however, that such conduct is also damaging to investor confidence in the fairness of capital markets. On the basis of this argument, an amendment to the FIEA was promulgated on 12 June 2013, under which all insiders are prohibited from conveying material undisclosed information to others with the purpose of enabling them to profit from the purchase or sale of shares of a company (this amendment became effective on 1 April 2014).
Disgorgement of profits of short swing trading. Officers or large shareholders of listed companies are required to turn over to such companies any profits arising from short swing trading (that is, the sale or purchase of shares conducted within six months following the purchase or sale of those shares), regardless of whether that trading is based on material undisclosed information. To facilitate company claims for disgorgement of short swing profits, officers and large shareholders must file reports with the FSA of all purchases and sales of shares of the relevant company, and certain parts of the information contained in those reports are conveyed to the relevant company.
Short selling. Under Japanese law, short selling may be conducted under certain conditions (see below). Officers and large shareholders are prohibited from engaging in short sales.
Market manipulation includes the following:
False trading. Market manipulation is prohibited under the FIEA. For example, false sales and/or purchases of shares, without intent to actually transfer those shares, are prohibited.
Acquisition of own shares. Under the Companies Act (Act No 86 of 2005, as amended), companies can acquire their own shares. That acquisition, however, must be in accordance with the procedures specified in regulations promulgated under the FIEA in order to prevent market manipulation.
Short selling. Short sales cannot be conducted at a price equal to, or less than, the most recent market closing price. In order to ensure compliance with this restriction, any transaction participant engaging in a short sale is required specify to the relevant securities exchange that it is undertaking a short sale.
Stabilisation can only be conducted under certain conditions (see Question 19).
Securities companies (more specifically, companies registered as "financial instruments business operators" under the FIEA) play an important role in the market, and accordingly the FIEA and related regulations set out various restrictions applicable to those securities companies. For example, securities companies are prohibited from providing their customer with compensation for losses incurred in the course of securities transactions.
Penalties for market abuse/insider dealing
The following penalties apply to insider trading:
Insider trading. Criminal penalties (imprisonment, fines and confiscation of any profits arising from the insider trading) and/or surcharges may be imposed for breach of this prohibition.
Disgorgement of profits of short swing trading. Criminal penalties (imprisonment and/or fines) may be imposed for breach of this reporting obligation.
Short selling. Criminal penalties (imprisonment and/or fines) may be imposed for breach of this prohibition.
The following penalties apply to market manipulation:
False trading. Criminal penalties (imprisonment, fines and confiscation of profits arising from market manipulation), surcharges and/or civil liabilities may be imposed for breach of this prohibition.
Acquisition of own shares. Non-penal fines can be imposed for breach of this restriction.
Short selling. Non-penal fines can be imposed for breach of this obligation.
Criminal penalties (imprisonment and/or fines) can also be imposed for breach of the restrictions concerning securities companies.
To voluntarily de-list, a listed company must submit an application for de-listing to the TSE accompanied by documents certifying that appropriate internal procedures to determine the de-listing have been completed within the company. Before submitting the application, a de-listing company will generally consult the TSE to confirm descriptions in the application and attachments.
The TSE can compulsorily de-list shares in a listed company if certain criteria for de-listing are met, including:
Decrease in the level of market capitalisation, tradable shares, and shareholders to below the minimum levels.
In 2015, a total of 23 companies were compulsorily de-listed from the First Section. Most de-listings resulted from acquisition of all issued shares or from reorganisation, including companies becoming wholly owned subsidiaries of other companies.
As of 29 February 2016, there were no important proposals for reform of equity capital markets/exchanges. In 2014, however, there were amendments to the FIEA and related regulations, intended to encourage new listing of emerging companies and to further facilitate financing by listed companies through Japanese capital markets. Among these amendments were the following.
Measures to encourage new listing of emerging companies. Previously under the FIEA and related regulations, companies in general were required to disclose financial statements for the five most recent fiscal years (audited financial statements for the two most recent fiscal years and unaudited financial statements for additional three fiscal years) in their securities registration statements. Under the amended regulations, however, required disclosure of financial statements was reduced from the five fiscal years to the two fiscal years for Japanese companies conducting IPOs. See also Question 12. Previously under Japanese stock exchange rules companies were required to meet a minimum requirement as to number of shareholders in order to qualify for listing, with the goal of ensuring liquidity. In order to facilitate new listings by emerging companies, however, the TSE adopted amended rules reducing the minimum number of shareholders for Japanese companies conducting IPOs through Mothers, JASDAQ Standard and JASDAQ Growth from 300 shareholders to 200 shareholders.
Measures to further facilitate financing by listed companies. Previously under the FIEA and related regulations, companies were required to delay commencement of sales of securities for a waiting period of at least seven days following the filing of a securities registration statement. This waiting period was intended to provide sufficient time for investors to consider their investment decisions. This waiting period was considered too lengthy, however, sometimes resulting in excessive price declines in stock offerings and forcing companies to change their business plans. The amended guidelines, however, provided exemption from this waiting period for companies which conduct offerings of listed shares or rights offering that result in dilution of total existing shares of less than 20%, and meet the following criteria:
The company has met continuous disclosure obligation for more than one year.
The relevant shares have been listed for more than 3.5 years.
The trading value of the shares and market capitalisation of the company are not less than JPY100 billion. See Question 7 for clarification of the scope of communications permitted prior to the filing of a securities registration statement.
Japanese Law Translation (Hourei data teikyo system)
W (Japanese original) http://law.e-gov.go.jp/cgi-bin/idxsearch.cgi
W (English translation) www.japaneselawtranslation.go.jp/?re=02
Description. The website on which the Japanese original of the FIEA is available is maintained by the Ministry of Internal Affairs and Communications (MIC), although the data contained there is not official. The data has been updated from time to time by MIC. The website on which an English translation of the FIEA is available is maintained by the Ministry of Justice. This English translation is prepared for reference purposes only and is unofficial and without binding force. The English translation was prepared on 2 June 2010 but has not since been updated.
Kazuhiro Yoshii, Partner
Anderson Mōri & Tomotsune
Professional qualifications. Japan, 1999; New York, US, 2006
Areas of practice. International financial and securities transactions; mergers and acquisitions; general corporate matters.
Hiroto Ando, Partner
Anderson Mōri & Tomotsune
Professional qualifications. Japan, 2002; New York, US, 2009
Areas of practice. Capital markets; mergers and acquisitions; corporate restructuring; general corporate matters.
Nobutake Nemoto, Associate
Anderson Mōri & Tomotsune
Professional qualifications. Japan, 2012
Areas of practice. Capital markets; mergers and acquisitions.