Identifying Shareholders and Buying Shares from Minority Shareholders in M&A
Since the majority of small and medium-sized companies are owner-operated, all or most of the shares are owned by the owners or their family, so-called family-owned companies. The criteria for determining whether a company is a family-owned company are also stipulated in the tax return, and the company is required to report whether it is a family-owned company or not. On the other hand, if a company has been operating for many years, some of its employees or relatives may own some of its shares, or a third party may own some of the outstanding shares in the process of acquiring another company, for example.
In some of the companies we consult with, more than 90% of the shares are owned by the family of the owner, but a minority of 5% to 10% of the shares are owned by employees or other third parties. Even in such a case, most of the resolutions of the general meeting are decided at the sole discretion of the owner, so there is no particular need to focus on the intentions of minority shareholders in the daily management of the company, and the existence of minority shareholders itself is not considered an issue. In some cases, the notice of convocation of a general meeting of minority shareholders itself is not given to minority shareholders.
In addition, for companies that have been in existence for many generations, it may be difficult to identify shareholders when shares are dispersed among relatives at the time of inheritance and ownership relationships are unclear.
In such cases, it is necessary to first determine who the actual shareholders are at this time. Even if a minority shareholder’s name has appeared in the company’s shareholders’ register or tax returns for more than 10 years, it is possible that the shareholder is merely a formal shareholder and not a real shareholder. Such shares are called nominal shares. The real shareholder is the person who received the allotment of shares and paid the consideration for the shares, and also the person who executed a true share transfer agreement at the time of the share transfer, paid the transfer price, and transferred the shareholder’s name to another person. If these procedures have not been followed, the shares become nominal shares and are not shareholders.
Since the old Commercial Code required at least seven promoters to incorporate a company, the appearance that seven promoters were formally gathered and shares were subscribed is often taken even for formal promoters who did not pay money. Even if the shares are said to have been acquired in writing, if no money has actually been contributed, the promoter will often be deemed not to be a shareholder if the case goes to court. Similarly, there are cases in which a shareholder is said to have acquired shares through a transfer of shares, but the transfer of shares itself is a sham. In such cases, if the case goes to trial, the status of the shareholder will be denied.
Therefore, in order to reflect the true shareholders in the shareholders’ list, the company would like to request that the nominal shareholders be removed from the shareholders’ list. However, if a representative of the company asks the nominal shareholder to remove his/her name from the list of shareholders, the company will usually be denied. The company will need to file a lawsuit against the person listed as a shareholder on the relevant shareholders’ register, seeking confirmation that he or she is not a shareholder.
If it is confirmed that the minority shareholder is the true owner of the shares, or if it is uncertain whether the minority shareholder is the true owner of the shares, but it is unlikely that the court will recognize the minority shareholder’s claim that he or she is not a shareholder because he or she has been treated as a shareholder continuously for many years, it is possible to request the shareholder to repurchase the shares.
Of course, whether or not to transfer shares is at the discretion of shareholders, so even a majority shareholder cannot force a minority shareholder to transfer shares. It is only with the consent of the minority shareholders that the shares will be purchased.
There is no clear legal guideline as to how much the transfer price of the shares should be, and the price should be agreed upon by the parties. In practice, the transaction example method based on recent transactions or the price obtained by dividing the net asset value by the number of shares outstanding (net asset value per share) are usually used.
An application for the purchase of shares may be made by the owner-manager as the shareholder himself, or by the company itself as the purchaser. However, there are certain restrictions on the purchase of shares by the company (share repurchase), such as the existence of distributable profits in the company.
If one of the shareholders of a listed company acquires information about a merger, etc., and then purchases the shares, this would constitute insider trading. In contrast, the provisions of the Financial Instruments and Exchange Law do not apply to unlisted companies, and therefore, such transactions do not constitute insider trading. However, if a person takes advantage of his/her advantageous position with confidential information to gain an unfair advantage, there is a possibility that an illegal act may be committed.
When selling all of the shares of an unlisted company to a buyer in a lump sum, it may be circumvented to purchase all of the shares held by the minority shareholders of the unlisted company at one time. In such cases, a power of attorney may be obtained from the minority shareholders of the unlisted company, and the principal shareholder may sign the share transfer agreement on behalf of all shareholders. In order to avoid disputes at a later date, the power of attorney from the minority shareholders should be stamped with a personal seal and a certificate of seal impression should be submitted.
Reverse Stock Split
A reverse stock split may be conducted by a special resolution at a general shareholders meeting. For example, a company issuing 10,000 shares may consolidate 100 shares into one share. In this case, the shares of minority shareholders holding less than 100 shares will become fractional shares and will be liquidated in cash and lose their voting shares.
Shareholders who oppose the reverse stock split may express their opposition to the company and demand that their shares be purchased at a fair price, but they cannot claim that they are still shareholders even if a special resolution is passed at a shareholders’ meeting. If the minority shareholders believe that the resolution is unfair, they must file a lawsuit to confirm the invalidity of the resolution.
A similar problem arises in the case of a merger between two companies: when companies A and B merge, the merger ratio is usually determined based on their respective net asset values, etc., and any shares that do not meet that ratio will be liquidated by payment of money as fractional shares.
For the owners, it is procedurally easy to eliminate minority shareholders through a reverse stock split, but if the purpose of the owners is simply to eliminate minority shareholders, the minority shareholders may claim that the resolution is too unreasonable and increase the risk of being sued in court. Therefore, when conducting a reverse stock split, it is necessary to clarify the justifiable purpose of the reverse stock split.
For example, if Company A incorporates Company B through a reorganization such as a corporate split or share exchange and transfers the assets of Company A to Company B, Company A will receive only shares of Company B or consideration for the transfer of Company B. The same applies when Company A transfers its business. In this case, Company B will be wholly owned by Company A or the new owner, so that a 100% company is formed and there are virtually no minority shareholders. If Company A is then dissolved or liquidated, Company A will cease to exist altogether, and the shareholders of Company A will only receive a cash grant and will completely lose their voting rights in the company.
Recently, for example, in cases where the principal shareholders own more than 90% of the shares, a simple act of reorganization is permitted, so the procedural burden is not so great. In addition, since there is usually some legitimate business purpose for a reorganization, it is more legitimate than a reverse stock split, and the risk of losing a lawsuit in court is lower. In addition, the Companies Act allows minority shareholders who oppose the reorganization to demand the purchase of their shares, so the procedural legitimacy of the reorganization is also considered high. Therefore, in practice, this reorganization act is generally used as a means of eliminating minority shareholders.
Even if the above reorganization action is not taken, if the shares themselves are converted into shares subject to call, the company can forcibly purchase all shares from shareholders upon the occurrence of certain events. Of course, it is impossible to imagine a company without shareholders, so when a company acquires existing shares of stock with callable clause, it will issue new shares to certain persons. Although it is easier to acquire shares when converting to wholly callable shares, it is not widely used in practice because of the procedural difficulties involved in conversion of shares.
Sales demand to heirs
When one of the current shareholders dies, his or her heirs may acquire the shares. The company may have no problem with the former shareholder remaining a shareholder, but may not be in favor of the heir becoming a new shareholder. In some cases, the company may have wanted to purchase a shareholder’s shares in the name of the company, but was unable to do so because the shareholder was opposed to the transfer, and then the shareholder died (the latter case appears relatively frequently).
In such a case, the company may, by resolution of a general meeting of shareholders, demand that the heirs sell the inherited shares within a period of one year after becoming aware of the fact that the inheritance has occurred. This demand for sale is extremely convenient for companies and seems to be used quite frequently.
However, in order to make the above-mentioned demand for sale, it is necessary to stipulate in advance in the articles of incorporation of the company that such a demand for sale may be made. Companies with minority shareholders should consider the possibility of the above and take measures to include a provision in the articles of incorporation allowing for a demand for sale to the heirs.