1.

Treasury shares will be clearly characterized as unissued stock and will be subject to corresponding restrictions.

There has historically been a debate over the fundamental nature of treasury shares, between the “unissued stock theory” camp and the “asset theory” camp. The proposed amendment aims to clarify this by adopting the “unissued stock” interpretation, expressly providing that treasury shares carry no rights. It further prohibits: (i) issuing bonds that are exchangeable for or redeemable with treasury shares; (ii) pledging treasury shares; and (iii) allocating new shares to treasury shares in the context of a merger or spin-off (Articles 341-3(2), 341-3(3), 529-2, and 530-13).
 

2.

Joint stock companies are required to cancel any of their own shares they acquire.

If a company acquires its own shares, it is in principle required to cancel those shares within one year following the date of acquisition (Article 341-4(1)). The same cancellation obligation applies to treasury shares already held, subject to an additional six-month grace period (Article 2 of the Addenda to the proposal). However, in any of the circumstances listed below (which correspond to the five Subparagraphs of Article 341-4(2)), the company may retain or dispose of treasury shares, provided it has formulated a plan for their holding or disposal and obtained approval at the general meeting of shareholders. The exception under Subparagraph 5 (see item 5 below) may be particularly significant. To rely on this exception, additional amendment to the articles of incorporation may be required, necessitating careful monitoring of future legislative developments. It is also noteworthy that the 3% voting right restriction (i.e., the rule limiting the combined voting rights of the largest shareholder and its related parties to 3%), previously proposed in some other bills as a condition for shareholder approval of an exception to the mandate to cancel treasury shares, has not been included in the proposed amendment.
 

(1)

Where the company disposes of treasury shares to all shareholders on equal terms in proportion to their respective shareholdings;

(2)

Where the company uses treasury shares for officer or employee compensation, such as granting stock options pursuant to Article 340-2 or 542-3;

(3)

Where the company uses treasury shares to implement employee stock ownership programs, such as granting employee stock options under the Framework Act on Labor Welfare;

(4)

Where the company uses treasury shares in a manner prescribed by law, such as under Article 360-2(2), Article 360-15(2), or Article 523, Subparagraph 3; or

(5)

Where the company uses treasury shares as necessary to achieve its business objectives, such as the introduction of new technology or improvement of its financial structure, and the rationale therefor is set forth in the articles of incorporation by resolution approved at a general meeting of shareholders pursuant to Article 434.
 

3.

Even where treasury shares are disposed of under one of the exceptions, such shares will be subject to general regulations governing the issuance of new shares.

Where a company retains or disposes of treasury shares under an exception to the general cancellation requirement, it must in principle offer such shares to existing shareholders on equal terms in proportion to their respective shareholdings (Article 342(1)). However, under the exceptions specified in Subparagraphs 2 through 5 above, the company may dispose of treasury shares to non-shareholders (Article 342(2) and (3)). Furthermore, where a company disposes of its treasury shares, the regulations governing new issuances shall apply mutatis mutandis to the extent not inconsistent with the nature of treasury shares (Article 342(4)).
 
If the proposed amendment is enacted, it will, as a general matter, make it more difficult to carry out financial transactions based on treasury shares, such as issuing exchangeable bonds based on treasury shares, using treasury shares as collateral for loans, or entering into derivative or structured finance transactions. As the exceptions permitting retention and disposal of treasury shares will be limited as described above, companies should be mindful that there may be significant changes in transactions related to corporate financial structure.

These changes will also have a substantial impact on shareholder return policies implemented through the acquisition and cancellation of treasury shares, as well as on disclosures of plans to enhance corporate value through such measures. Accordingly, listed companies should take this into account in, among other things, their future investor communications and IR activities, responses to proposals from minority shareholders, and preparation for general meetings of shareholders.