PLC Global Finance update for September 2009: Japan


Companies and corporate governance

New Japanese Government is planning new companies regulations

With the historic victory of the Democratic Party that ended more than 50 years of unbroken rule by the governing Liberal Democratic Party, Japan has a new government with new ideas regarding corporate regulation. These new ideas are enshrined in a set of draft regulations applicable to listed companies and prepared by a project group established by the Democratic Party (Group).

Under Japanese law, listed companies are generally subject to regulation by the Companies Act and the Financial Instruments and Exchange Act. The Group has proposed special legislation applicable to listed companies (Listed Companies Act) that would apply in addition to the current regulations.

Two main aims of this special legislation are:

  • The adoption of an employee representation system. The Group's proposal is based on the co-determination system that exists in Germany, whereby the audit committee comprises an equal number of shareholders and employees. However, unlike the German system, the Group is planning to have one or more statutory auditor(s) appointed from the labour unions or from the pool of employees. By proposing this system, the Group has demonstrated that it is keen on protecting the interests of various stakeholders in the company; not just shareholders.

  • Tightening of the requirements regarding the appointment of independent directors. The Group will amend the current ability to appoint independent directors from affiliates, parent companies, lending banks or business partners to much stricter requirements.

According to an anonymous source, this plan has not been formally authorised by the Democratic Party. However, the Group seeks to implement its proposals in 2011 and is revising them so that they can be submitted to the Diet in the near future. The Group will have to juggle the interests of various interest groups, such as labour unions and the relevant ministries (which include the Ministry of Justice, the Financial Services Agency, the Ministry of Economy, Trade and Industry and the Ministry of Health, Labour and Welfare).


Financial instruments

Amended Commodity Exchange Act will change the face of commodity derivatives business in Japan

A bill to amend the Commodity Exchange Act (Act No. 239 of 1950) was enacted on 3 July 2009. The purpose of the amendments, which provide the outline of a new regulatory framework for commodity derivatives business in Japan, is to secure the integrity and proper operation of such business.

Some of the notable amendments are set out below.

Title change

The title of Commodity Exchange Act will change to "Commodity Futures and Exchange Act".

Licensing for commodity exchange business regarding

The current Commodity Exchange Act regulates domestic commodity exchange transactions. It does not regulate OTC commodity derivatives transactions not referring to market prices on domestic commodity exchanges.

Although OTC transactions are regulated by other laws, no licence is required for any companies engaging in such transactions in Japan. However, the amendments will expand regulations on business in Japan regarding offshore commodity exchange transactions and OTC commodity derivative transactions that do not refer to market prices on domestic commodity exchanges.

As a result, foreign companies that intend to conduct the following types of business in Japan will be required to get the approval of the Minister responsible for the Ministry of Economy, Trade and Industry:

  • Acting as an intermediary, a broker or an agent for offshore commodity exchange transactions.

  • Entering into or performing OTC commodity derivative transactions, or acting as an intermediary, a broker or an agent for such OTC commodity derivative transaction, whether or not it refers to market prices in domestic commodity exchanges.

Commodity futures traders

Commodity futures traders will be subject to client protection regulations, such as:

  • Segregation of the clients' assets.

  • Restrictions on advertising.

  • Obligations of disclosure to clients.

  • Restrictions on compensation for losses.

  • Restrictions on net assets ratio.

Commodity Futures Intermediary

Commodity futures intermediaries will be subject to regulations such as prohibitions on holding the clients' assets, restrictions on advertising, obligations of disclosure to clients, and restrictions on compensation for losses.

The Amended Commodity Exchange Act will come into effect within a year and a half of 10 July 2009 and the details will be provided in a cabinet order before the effective date of the Amended Commodity Exchange Act.


Restructuring and insolvency

New option for out-of-court workouts for Japanese companies

For potential sponsors interested in investing in Japanese companies through their turnaround (restructuring) processes, having a variety of out-of-court workout procedures available is desirable. Since Septmeber 2009, the Enterprise Turnaround Initiative Corporation of Japan (ETIC) (Kigyo-saisei Shien Kiko) as added yet another method to options available for effecting such an investment.

Among the various types of out-of-court workout procedures the most popular in recent years have been:

  • Turnaround ADR (Jigyo-saisei ADR). This is an ADR procedure conducted by an organisation that is both:

    • certified by the Minister of Justice under the Act on Promotion of Use of Alternative Dispute Resolution; and

    • recognised by the Minister of Economy, Trade and Industry under the Act on Special Measures for Industrial Revitalisation and Industrial Innovation (formerly Act on Special Measures for Industrial Revitalisation).

    Currently, the Japanese Association of Turnaround Professionals (JATP) (an association of turnaround practitioner lawyers, accountants, bankers and consultants) is the only organisation certified and recognised to conduct turnaround ADR procedures. The JATP commenced operations at the end of 2008 and six listed companies and one unlisted company have reportedly filed. These include, most recently, AIFUL Corporation (a major consumer loan firm) and WILLCOM Inc (a mobile telecommunications company).

  • Small and Medium Enterprise Turnaround Support Centres (Chusyo-kigyo Saisei Shien Kyogikai). These are local turnaround consulting service providers usually established by local chambers of commerce in each prefecture of Japan. Since starting operations in 2003, the Centres have provided consultation services to more than 18,000 companies and, by the end of June 2009, had reportedly assisted with the completion of turnaround plans for more than 2,200 companies.


The ETIC was established with the aim of managing more complex workouts for companies where a higher level of initiative and more intensive use of professional expertise are required than cases filed with a turnaround ADR or SME Turnaround Support Centres.

A company seeking support from ETIC must submit draft restructuring and revitalisation plans which have been negotiated with its main lending banks in advance. The ETIC will then:

  • Conduct due diligence on the company.

  • Conduct negotiations among the lending banks on debt restructuring and business restructuring.

  • Conducts talks with, and deal with bids made by, potential sponsors.

  • Clarify the responsibilities of management and shareholders.

  • Screen whether the restructuring and revitalisation plan will work, while also satisfying the criteria ETIC sets (once ETIC has decided to support buy out loans from the lending banks at discounted prices (and in some cases inject capital)).

  • Monitor implementation of the plan.

ETIC will exit any positions they have taken in the company by selling loans (and shares) that they have acquired or by other means.

The costs incurred by ETIC in supporting workouts (for example, the cost of buying loans from banks and injecting capital into target companies) will be funded by other banks or investors and supported by a government guarantee (the commitment for which being JPY1.6 trillion for the 2009 fiscal year).

These out-of-court workout procedures are characterised by transparency, neutrality of process and fairness (for example, proportionate discounts of purchase prices of loans). These are also features of court-sanctioned workout proceedings (that is, Civil Rehabilitation Proceedings and Corporate Reorganisation Proceedings), but have the advantage of being flexible and expedient.

Further, the filings and the commencement of the above procedures carry less of stigma than the filing and commencement of court-based proceedings. Also, unlike court-based proceedings, they usually do not automatically lead to acceleration of debt obligations owed by the company because of the way insolvency events of default are usually drafted.

The disadvantage of such procedures is that they require voluntary consents from all affected lenders for any debt restructurings, which may be difficult and costly to obtain.

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