April 14, 1992
TO: INVESTMENT ADVISER MEMBERS NO. 16-92
RE: DISCLOSURE REQUIREMENTS IMPOSED BY JAPANESE LAW
ON LARGE SHAREHOLDERS
__________________________________________________________
Counsel retained by the Institute in Japan has provided
information about Japan's "5 percent Rule", which imposes
disclosure obligations on shareholders holding positions in
securities listed on a Japanese securities exchange or traded in
the Japanese over-the-counter market. The new disclosure
requirements, which were part of an amendment to the Securities
Exchange Law of Japan promulgated on June 22, 1990, became
effective December 1, 1990. Many of the details regarding
implementation of the Rule are set forth in Orders issued by
Japan's Ministry of Finance, English translations of which are as
yet unavailable.
Generally, the 5 percent Rule provides that a person or
entity that owns more than 5 percent of an issuer's securities
must disclose information related to the holdings to the Ministry
of Finance, the issuing corporation, and either the relevant
stock exchange or the Japanese Securities Dealers Association.
Disclosure must be made within five working days after the 5
percent threshold is first exceeded, and also following certain
changes in holdings. The rule is modified in the case of
investment companies and certain other entities.
The following discussion highlights some of the Rule's main
features. Members doing business in Japan might wish to consult
their own counsel to determine the application of the Rule in
specific circumstances.
A. Shareholders Obligated to File
The Rule places the disclosure obligation on any person who
a) owns, b) has the voting rights to, or c) has the authority to
dispose of more than 5 percent of the outstanding shares of a
company. All beneficial owners of securities are subject to the
Rule, regardless of whether the shares are held in the name of a
third party or nominee. Voting rights include the power to
instruct some other person, such as a trustee, how to vote the
shares. Where different persons have the power to vote and
dispose of securities, each will be considered an owner for
purposes of the Rule. Persons who are committed to purchase
shares in the future are considered shareholders under the Rule.
If there are "group owners" of shares and the total amount
held by them exceeds 5 percent, all must file, either jointly or
separately. Group owners include shareholders who agree to
purchase, transfer or exercise the voting rights with respect to
shares jointly, and also includes related persons or entities
such as husband and wife and a parent company and its
subsidiaries.
It is important to note that an investment adviser is
deemed to own, and must aggregate, securities owned by its
clients that are subject to the Rule if the adviser has the right
to dispose of the securities.
B. Securities Subject to the 5 Percent Rule
The reporting requirements apply to securities of
corporations listed on a stock exchange in Japan and companies
the shares of which are traded in the over-the-counter market and
registered with the Japanese securities Dealers Association.
Equity-related securities must be counted in determining a
disclosure obligation. Thus, the securities to be reported under
the Rule include a) shares (excluding non-voting preferred
shares), b) convertible bonds, c) bonds with warrants to
subscribe for shares, d) certificates representing the right to
subscribe for shares, e) warrants to subscribe for shares, and f)
securities or certificates issued by foreign companies which are
of the same nature as instruments described in a) to e). It is
important to note that we are informed that the owner of American
Depositary Receipts or similar instruments is deemed to own the
securities underlying the ADRs for purposes of the Rule.
C. Calculations
In determining whether the 5 percent threshold has been
exceeded, the total number of shares held is divided by the total
number of outstanding shares. In cases where stock holdings
include or consist entirely of equity-related securities, the
equity related securities must be translated into shares in
accordance with a formula established by the Ministry of Finance.
In such a case, the number of shares translated from equity-
related securities would be added to the number of shares
outstanding in determining the percentage of shares owned.
D. When to File
For shareholders owning more than 5 percent of an issuers's
outstanding securities prior to the effective date of the Rule,
the Report was required to be filed within 5 days, excluding
holidays, following the effective date. Other shareholders are
required to file within 5 business days after first becoming a
holder of more than 5 percent. Amendments to filed Reports must
be made within 5 days following a change of more than 1 percent
in the holdings, or whenever there has been a material change
affecting the Report as filed, such as a change in the filer's
name, address or purpose for holding the shares. Filing
obligations continue until an Amendment is filed that states that
the shareholder's holdings have fallen to no more than 5 percent.
E. Information Required
The Report to be filed under the 5 percent Rule calls for
fairly detailed information, including:
- information concerning the shareholder and the
subject company;
- number of shares held, with information as to the
types of shares held;
- purpose of ownership;
- source of funding for the purchase of the shares;
- information concerning any agreements or
arrangements with respect to the shares;
- information concerning recent trading activities.
F. Exceptions to the 5 Percent Rule
There are special reporting requirements for securities
companies, insurance companies, investment fund trusts, local
governments, etc. In general, these entities are subject to
modified reporting requirements except when they hold shares for
the purpose of controlling the issuer or when they hold more than
a certain percentage of an issuer's shares (which may be set at
10 percent). We understand that the modified reporting
requirements are:
- filing obligations are determined as of the end of
each quarter. If ownership exceeds 5 percent at
the end of a quarter, the Report must be filed
within 15 days after the end of the quarter. It
appears that there is no obligation to file if
holdings exceed 5 percent at times during a
quarter, so long as they do not exceed 5 percent at
the end of the quarter.
- If a report has already been filed with respect to
a quarter, and its holdings increase or decrease by
more than 1 percent as of the end of any subsequent
quarter, an amendment must be filed within 15 days
of the end of the quarter.
G. Penalties
Failure to file a Report or an Amendment or a fraudulent
filing can result in imprisonment for up to one year or a fine of
up to one million yen.
Members wishing further information about this Rule should
contact the undersigned at (202) 955-8419 for copies of memoranda
prepared by the Japanese Securities Dealers Association and two
Japanese law firms that describe the Rule.
We will keep you informed of further developments.
Angela C. Goelzer
Assistant Counsel - International