Investment Procedures by Domestic and Foreign Investors ～DES (Debt Equity Swap)～

Introduction

When launching a new business, there are several fundraising methods such as investment, loan, subsidies and grants, etc. If it is difficult to receive a loan from a financial institution or subsidies and grants from the government at the time of launching a new business, it may be possible to fundraise by receiving investment from domestic and foreign investors. If it is difficult to receive a loan from a financial institution or subsidies and grants from the government at the time of launching a new business, it is possible to fundraise by receiving investments from domestic and foreign investors. However, when actually receiving investments from domestic and foreign investors, there are various domestic and foreign laws and regulations, etc., so it is important to carefully read the laws and regulations, etc., to ensure that you do not violate any of those laws and regulations, etc. Therefore, it is necessary to proceed with each procedure carefully so as not to violate those laws and regulations, etc.

In this column, I first explain the normal investment procedure (procedure for issuing new shares by cash investment), and then explain the Debt Equity Swap.

Procedure for Issuing New Shares by Cash Investment

What is the Procedure for Issuing New Shares by Cash Investment?

First, the procedure for issuing new shares means that Kabushiki Kaisha issues shares for fundraising purposes. There are two ways of fundraising by Kabushiki Kaisha: direct financing by issuing shares or stock acquisition rights, and indirect financing by issuing bonds or borrowing from banks. While corporate bonds and bank loans are subject to the obligation to repay the borrowings, shares or stock acquisition rights are characterized by the fact that there is no obligation to return the investment money.

The term “allocation of new shares to a third party” is used when shares are allocated to a specific third party. Even if the person to whom shares are allocated is a former shareholder, it is still an allocation of new shares to a third party, unless the shares are allocated equally to all shareholders.

For more information on procedures for issuing new shares, please refer to the column “Procedures for issuing new shares” in the Kuribayashi Sogo Law Office.

Notification and Reporting to Bank of Japan under the Foreign Exchange and Foreign Trade Act

Advance notification to Bank of Japan under the Foreign Exchange and Foreign Trade Act

When foreign investors (corporations, etc. established in accordance with foreign laws and regulations) acquire shares of an unlisted company in Japan, and the business sector in which the investee operates includes a business that falls within a designated business sector (a business sector specified by the Minister of Finance and the minister having jurisdiction over the business pursuant to Article 3(3) of the Order on Inward Direct Investment, etc. (Direct Investment Order)) In the case where the investee’s business sector includes a business that belongs to a designated business sector (business sector specified by the Minister of Finance and the minister having jurisdiction over the business pursuant to Article 3(3) of the Direct Investment Order), the foreign investor is required to submit an advance notification to Bank of Japan The foreign investor is required to make an advance notification to the Bank of Japan prior to the investment procedure under the Foreign Exchange and Foreign Trade Act.

In cases where foreign investors are required to submit an advance notification to Bank of Japan under the Foreign Exchange and Foreign Trade Act, and the foreign investor is not resident in Japan, a person residing in Japan is required to submit the advance notification to Bank of Japan as an agent of the foreign investor. If the foreign investor is not resident in Japan, a person residing in Japan is required to make the advance notification to Bank of Japan as an agent of the foreign investor.

Advance notification to Bank of Japan under the Foreign Exchange and Foreign Trade Act must be made within six months prior to the date of investment. When foreign investors acquire shares of an unlisted company in Japan, they (or their agent) are required to prepare a “Notification of Acquisition of Shares, Equity Interests, Voting Rights, or Authority to Exercise Voting Rights, or Discretionary Investment in Shares (1)” and submit it to Bank of Japan. (1)” and submit it to Bank of Japan.

With respect to the procedures for the performance of investment by foreign investors, as a general rule, until 30 days have elapsed from the date of receipt of the notification by the Bank of Japan (“Period of Prohibition”), the notified transaction or act may not be carried out. In principle, the notified transaction or act may not be conducted until 30 days have elapsed from the date of receipt of the notification by Bank of Japan (“Period of Prohibition”). However, the Period of Prohibition may be shortened in cases where the investment does not cause damage to the security of Japan, etc., and the examination may be completed in as few as four business days counting from the day following the day of the filing of the notification.

On the other hand, if the notified matter is found to be a hindrance to the safety or other aspects of Japan, the Minister of Finance and the minister having jurisdiction over the project may recommend that the investment be changed or discontinued, and the Period of Prohibition may be extended for up to five months as a review period for this purpose.

A notified transaction or action that has been reviewed may be executed at any time during the period of six months from the “date of receipt” as long as it is within the scope of the notification and after the date (after the Period of Prohibition) when the transaction or action may be executed as publicly announced by the Bank of Japan. The “Date of Acceptance” is the date of the acceptance of the transaction or act.

Ex-Post-Facto Report to Bank of Japan under the Foreign Exchange and Foreign Trade Act

Even if an advance notification to Bank of Japan under the Foreign Exchange and Foreign Trade Act is not required, an ex-post facto report to Bank of Japan may be necessary.

Specifically, when foreign investors acquire shares in an unlisted company in Japan, all of the following conditions must be met: (1) the nationality and country of residence of the foreign investors must be Japan or one of the countries listed in the table; (2) the business of the investee must not include any business in a designated industry, or the investee must use the advance notification exemption system; and (3) the foreign investors must not engage in any activity that is conducted by Iranian-related persons. (2) the business of the investee does not include any business in a designated industry or is exempted from advance notification, and (3) the investment is not made by an Iranian-related person. If the investment ratio of the foreign investors based on actual shares or the ratio of voting rights based on actual shareholdings together with closely related parties exceeds 10% on the day after the foreign investor subscribes for shares, the foreign investor is required to make an ex-post facto report to Bank of Japan under the Foreign Exchange and Foreign Trade Act. post-facto report to Bank of Japan under the Foreign Exchange and Foreign Trade Act.

Since ex-post-facto reports are required for a wide range of industries, in many cases an ex-post-facto report to the Bank of Japan will be required when foreign investors make an investment. The ex-post facto report to Bank of Japan must be made within 45 days from the date the investment is made.

For more information on advance notification, ex-post-facto report, etc. to Bank of Japan in connection with investment procedures by foreign investors, please refer to the Kuribayashi Sogo Law Office column entitled “Advance notification for inward direct investment, etc.“.

General Meeting of Shareholders

In order to perform the procedure for issuing new shares, if the share issuing company is a private company (Kabushiki Kaisha whose articles of incorporation provide for restrictions on the transfer of all shares to be issued), it is necessary to go through the general meeting of shareholders procedure regarding the “decision to offer” and “approval of the Underwriting Agreement” (Companies Act 199(2), 205(2)). If the share issuing company is a private company (Kabushiki Kaisha, whose articles of incorporation provides that all shares to be issued are subject to transfer restrictions), it is necessary to hold a general meeting of shareholders to “decide on the offering” and “approve the Underwriting Agreement” (Companies Act 199(2), 205(2)). On the other hand, if the share issuing company is a public company (a Kabushiki Kaisha that issues one or more non-transferable shares), it is possible to issue new shares by board resolution (Companies Act However, if the issuance of new shares constitutes a favorable issuance, a special resolution by the general meeting of shareholders is required (Article 201(1), 199(3), and 309(2)(v) of the Companies Act).

If the share issuing company is a one-person company (a company with only one shareholder), the general meeting of shareholders procedure can be conducted by means of a written resolution (deemed resolution). A written resolution is a resolution that is deemed to have been passed at a general meeting of shareholders if all shareholders with voting rights agree in writing to the resolution. If a general meeting of shareholders is to be held by way of a written resolution, a Shareholder’s Proposal and Consent Form and general meeting of shareholders minutes must first be prepared. The Shareholder’s Proposal and Consent Form is a form in which a shareholder proposes an item for resolution at the general meeting of shareholders and the shareholders agree to the proposal. The shareholder’s Proposal and Consent Form is a written statement that the shareholder has made a proposal for a general meeting of shareholders resolution and that the shareholder has consented to the proposal. Therefore, in the case of a written resolution (deemed resolution), a representative of the share issuing company must submit a “Shareholder’s Proposal and Consent Form” regarding the decision of offering and approval of the Underwriting Agreement. In the case of a written resolution (deemed resolution), therefore, if a representative of the share issuing company affixes his/her seal to documents such as “Shareholder’s Proposal and Consent Form” and “extraordinary general meeting of shareholders minutes” regarding the decision of offering and approval of the Underwriting The general meeting of shareholders procedure for the decision on the offering and approval of the Underwriting Agreement is completed when the “Shareholder’s Proposal and Consent Form” and the “extraordinary general meeting of shareholders minutes” are signed.

Notification and Public Notice of Offering

If the share issuing company is a public company, it is obliged to notify or publicly notice the offering in relation to the shares at least two weeks before the date of performance of the investment (Companies Act 201 (3)(4)). On the other hand, if the share issuing company is a private company, unlike a public company, the above notification or public notice obligation is not imposed.

In addition, the share issuing company is usually obliged to notify the applicant of the allocation of the share for subscription at least two weeks before the date of performance of the physical investment (Companies Act 204(3)). However, if the company issuing the share for subscription has entered into an underwriting agreement with the underwriters of the offered shares, the above notification procedure can be omitted (Companies Act 205(1)). Companies Act 205(1)).

Execution of Underwriting Agreement

Underwriting Agreement is an agreement between a share issuing company and the underwriters of the offered shares after the share issuing company has decided in advance who the underwriters of the offered shares will be. The agreement is an agreement between the share issuing company and the underwriters of the offered shares regarding the underwriting of the share for subscription.

Under the 2014 amendments to the Companies Act, an underwriting agreement for restricted stock must be approved by a special resolution of the general meeting of shareholders (or by a resolution of the board of directors in the case of a company with a board of directors) (Companies Act 205(2)). The Companies Act was amended in 2014 to require that an underwriting agreement for restricted stock must be approved by a special resolution of the general meeting of shareholders (or by a resolution of the board of directors in the case of a company with a board of directors) (Companies Act 205(2)). However, if the articles of incorporation provide otherwise, it is subject to the provisions of the articles of incorporation, so if the articles of incorporation specify the representative director as the approving body, the Underwriting Agreement is subject to the approval of the representative director (Companies Act 205(2)). If the articles of incorporation specify the representative director as the approving authority, the Underwriting Agreement is subject to the approval of the representative director (Companies Act 205(2) proviso).

Procedures for performance of Investment

Investment Performance Procedures

Underwriters of the offered shares must pay the amount of investment money into the account designated by the share issuing company by the payment date (or the last day of the payment period).

If the underwriters of the offered shares are foreign investors, it may be necessary to make payment in foreign currency such as USD instead of JPY. When performing an investment in shares, payment may be made in foreign currency such as USD instead of JPY.

There are several possible ways to make payment in foreign currency in the performance of investment in the procedure for issuing new shares. One method is to enter the amount to be paid in the foreign currency in which the payment is to be made on the Shareholder’s Proposal and Consent Form, the extraordinary general meeting of shareholders minutes, the Underwriting Agreement, etc., and then pay the underwriters of new shares in the foreign currency in which the payment is to be made. The underwriters of the offered shares may pay the investment money in the foreign currency in which the payment is to be made and the share issuing company may receive the investment money in the foreign currency in which the payment is to be made. The share issuing company may receive the paid-in investment money in the foreign currency.

In this case, the capital stock must be registered in JPY, so if payment is made in foreign currency, the total amount in JPY calculated by the exchange rate on the date the investment money is transferred to the share issuing company’s account (the date of deposit) will be the amount of the increase of capital. In the case of payment in foreign currency, the total amount in JPY calculated by the exchange rate on the date the investment money is transferred to the share issuing company’s account (the date of deposit) will be the amount of the capital stock to be increased of capital.

For example, suppose underwriters of the offered shares transfer $50,000 on February 5 and $50,000 on February 8 to the account designated by the share issuing company as performance of $100,000 of investment money. Suppose that the exchange rate on February 5 was 150 yen to the dollar and the exchange rate on February 8 was 140 yen to the dollar. In this case, the amount of the increase of capital stock of the share issuing company would be as follows based on the exchange rate on the day of transfer.

Formula
　February 5: $50,000 x 150 yen = 7,500,000 yen
　February 8: $50,000 x 140 yen = 7,000,000 yen
　Amount of increase of capital stock: 7,500,000 yen + 7,000,000 yen = 14,500,000 yen

In the case of the above method, the total amount of JPY calculated by the exchange rate on the day when the investment money is transferred to the account designated by the share issuing company will be the amount of the capital stock to be increased of capital. Therefore, there is a high possibility that the amount of capital stock will not be sufficient.

On the other hand, if the above method is used, there is no need to deal with the risk of large fluctuations in exchange rates in the general meeting of shareholders procedure or in the notification to the Bank of Japan. In other words, if the exchange rate declines significantly between the time of the resolution of the general meeting of shareholders and the time of the investment, the amount of the investment in foreign currency will be less than the amount of the investment in JPY resolved at the general meeting of shareholders. In other words, if the exchange rate drops significantly between the time of the general meeting of shareholders and the time of investment, the amount of investment in foreign currency will not be less than the amount of investment in JPY resolved at the general meeting of shareholders.

Report on Remittance to Bank of Japan under the Foreign Exchange and Foreign Trade Act

When remittances from overseas are received in an account at a Japanese bank, if the amount of remittance per remittance exceeds the equivalent of 30 million yen, the Japanese resident who received the remittance is required to report the remittance to the Bank of Japan The Japanese resident receiving the remittance is required to report the remittance to Bank of Japan under the Foreign Exchange and Foreign Trade Act.

However, when receiving remittances from overseas in an amount exceeding the equivalent of 30 million yen per remittance, the Japanese resident who received the remittance can usually contact the bank where the remittance was received to receive assistance from the bank representative regarding the preparation of the report, etc. Therefore, when receiving remittances from overseas in an amount exceeding the equivalent of 30 million yen per remittance, it is advisable to contact the bank to which the remittance is to be sent in advance and consult with the bank regarding the preparation of the report, etc.

Execution Report to Bank of Japan under the Foreign Exchange and Foreign Trade Act

When foreign investors who have submitted an advance notification to Bank of Japan under the Foreign Exchange and Foreign Trade Act “acquire or dispose of shares, interests, voting rights or voting rights, or discretionary investment in shares,” they are required to report to the Minister of Finance and the minister having jurisdiction over the business through Bank of Japan within 45 days. When such a disposition is made,” it must be reported to the Minister of Finance and the minister having jurisdiction over the business through the Bank of Japan within 45 days using the form prescribed in the Direct Investment Order. Therefore, foreign investors (or their agents) who have made an advance notification to Bank of Japan under the Foreign Exchange and Foreign Trade Act, within 45 days after the completion of the performance of the investment, The Bank of Japan is required to submit an execution report to the Bank of Japan within 45 days after the completion of the investment.

Procedures for Entry in the Shareholders’ Register

Along with the issue of new shares, it is necessary to add the share for subscription subscribers to the register of shareholders of the share issuing company (Companies Act 132(1)(i)).

Registration Procedures for Change of Capital Stock (Increase of Capital)

Since the number of outstanding shares and the amount of capital stock of the share issuing company will change as a result of the issue of new shares, the registration procedures for share for subscription issuance must be completed within two weeks of the effective date of the share issuance (the date of investment) at the regional legal affairs bureau (Companies Act 915(1)), Therefore, it is necessary to make registration procedures for share for subscription issuance at the regional legal affairs bureau within two weeks of the effective date of share issuance (the date of investment) (Companies Act 915(1)).

If a company (private company and company without board of directors) has made the usual procedure for issuing new shares by means of an Underwriting Agreement, The following documents must be prepared for the registration application.

• Application for Change of Registration
• Shareholder list
• general meeting of shareholders minutes regarding approval of the Offering Decision and Underwriting Agreement
• Underwriting Agreement
• certificate of payment
• Transaction statement (to be bound with the certificate of payment)
• Certificate of recognition of the amount of capital stock
• Power of Attorney for Proceedings (when delegating registration procedures to an agent)

In addition, upon registration of the increase of capital, a registration tax of “the amount of increased capital stock x 7/1000” (minimum payment is 30,000 yen) must be paid to the regional legal affairs bureau. The minimum payment is 30,000 yen. For example, if the capital stock is 10 million yen, the registration tax to be paid to the regional legal affairs bureau is 70,000 yen (10 million yen x 0.007). In addition, it is possible to reduce the registration tax by setting one-half of the investment amount as capital reserve in the case of an increase of capitalregistration.

Investment Procedure by DES (Stock Transfer Procedure for Loan Receivable)

What is a Debt-Equity Swap (DES)?

DES (Debt Equity Swap) is a procedure whereby a creditor with a loan receivable from a company transfers that receivable to the debtor company’s shares. DES (Debt Equity Swap) is a procedure whereby a creditor with a loan receivable from a company transfers the receivable to the debtor company’s shares.

In the case of a normal procedure for issuing new shares, the underwriters of the offered shares are required to make a “cash” payment in order to make the investment. On the other hand, in the case of DES, the underwriters of the offered shares make a physical investment of their own “loan receivable” to the share issuing company in the performance of the investment. The DES is a DES.

Advantages of DES

When a DES provides a procedure for issuing new shares, the share issuing company (debtor of the loan receivable) is released from its financial obligation to the underwriters of the offered shares (creditor of the loan receivable). In addition, the share issuing company (debtor of loan receivable) will be relieved of its financial obligation to the underwriters of the offered shares (creditor of loan receivable) and its equity capital will be increased, which may improve the financial condition of the company. In addition, as an underwriter of the offered shares (creditor of loan receivable), you will be able to participate in the management of the company from the standpoint of a shareholder, and you will be able to earn profits from the dividends and sales of the shares.

As described in “2.2 Notification and reporting to Bank of Japan under the Foreign Exchange and Foreign Trade Act”, when foreign investors (corporations established under foreign laws and regulations, individuals not residing in Japan, etc.) make an investment in a Japanese company, depending on the nature of the business of the share issuing company, they may be required to notify the Bank of Japan prior to making the investment. As described in “2.2 Notification and reporting to Bank of Japan under the Foreign Exchange and Foreign Trade Act”, when foreign investors (corporations established under foreign laws and regulations, individuals not residing in Japan, etc.) make an investment in a Japanese company, depending on the business of the share issuing company, they may be required to notify the Bank of Japan under the Foreign Exchange and Foreign Trade Act prior to making the investment. In some cases, the share issuing company may be required to file a notification with the Bank of Japan under the Foreign Exchange and Foreign Trade Act prior to making the investment.

In the case of an advance notification to Bank of Japan under the Foreign Exchange and Foreign Trade Act, the examination is supposed to be completed within a minimum of four business days from the day following the day of the notification. However, in the case of an advance notification to Bank of Japan, the relevant ministries and agencies will conduct a detailed investigation of the parent company, controlling shareholders, etc. of the share issuing company. Therefore, it may take one to two months to complete the examination.

Until the Bank of Japan completes its examination, foreign companies and individuals who do not reside in Japan are prohibited from issuing new shares, so a share issuing company will be at a disadvantage in that it will not be able to fundraise early in the case of a procedure for Therefore, in the case of issuing new shares by cash investment, the share issuing company will be at a disadvantage in that it will not be able to conduct fundraising at an early stage. Therefore, DES may be used as a means to avoid such a disadvantage.

Specifically, a Loan Agreement is concluded between the foreign investors and the share issuing company, and the share issuing company makes a fundraising as a debt (loan), and after the examination by Bank of Japan is completed, a DES (investment method of transferring the loan receivable to shares) is used to process for issuing new shares. After completion of the examination by Bank of Japan, the share issuing company will then conduct DES (investment method of transferring loan receivable to shares) to provide a procedure for issuing new shares. This method enables the share issuing company to avoid the disadvantage of not being able to fundraise during the period until the Bank of Japan’s examination is completed, and to achieve early fundraising.

Loan Agreement and Stock Purchase Agreement

When a DES is used to provide a procedure for issuing new shares, a Loan Agreement The Loan Agreement is then concluded between the underwriters of the offered shares (creditors) and the share issuing company (debtor). The underwriters of the offered shares (creditor) will then transfer the loan proceeds in accordance with the Loan Agreement.

In addition, since the loan receivable is expected to be transferred to the shares of the share issuing company, which is the debtor, in the future through DES, a separate Stock Purchase Agreement is to be executed between the share issuing company (debtor) and the underwriters of the offered shares (creditor). Therefore, a separate Stock Purchase Agreement is to be executed between the share issuing company (debtor) and the underwriters of the offered shares (creditor).

Notification to Bank of Japan, General Meeting of Shareholders, Notification and Public Notice of Offering, Conclusion of Underwriting Agreement

In the case of DES, the same procedures for notification and reporting to the Bank of Japan, general meeting of shareholders, notification and public notice of offering, and conclusion of an Underwriting Agreement are to be followed as in the case of a normal procedure for issuing new shares. The same procedures are basically to be followed in the case of a DES as in the case of a normal procedure for issuing new shares.

Procedure for Performance of Investment by DES

Physical Investment in Loan Receivable

In the case of an investment in a DES, the underwriters of the offered shares (creditor) are required to make a physical investment of the loan receivable held by the share issuing company (debtor) within the period specified in the offering decision (Companies Act 199(1)(iv)) (Companies Act 208(2)). If the creditor makes a physical investment in the debtor’s company, the creditor and the debtor are required to make a physical investment of the loan receivable held by the creditor to the debtor within the period specified in the offering decision (Companies Act 199(1)(iv)). If the creditor makes a physical investment in the debtor company, the loan receivable under the Loan Agreement will be extinguished due to the confusion between the creditor and the debtor (Article 520 of the Civil Code).

Procedures for Proving the Value of Physical Investment Property

When underwriters of the offered shares make an investment by means of physical investment, the share issuing company is required, in principle, to petition the court for the appointment of an inspector to investigate the value of the physical investment property (Companies Act 207(1)-(3)) and to have the property investigated by the inspector. In order to have the court investigate the value of the physical investment property, the share issuing company must file a petition for the appointment of an inspector (Companies Act 207(1)-(3)) and have the property investigated by the inspector (Companies Act 207(4)-(6)).

However, the following five cases are exempt from the above inspector’s investigation

1. If the total number of shares to be allocated to the subscribers of a share for subscription does not exceed one-tenth of the total number of shares outstanding (Article 207(9)(i) of the Companies Act)
   ※For example, if the total number of shares outstanding is 100 shares, the inspector’s inquiry is not required if the total number of shares to be allocated to new shareholders who make a physical investment is limited to 10 shares.
2. The value determined by the company for physical investment property (Companies Act 199(1)(iii)) does not exceed 5 million yen (Companies Act 207(9)(ii)).
3. Investments in marketable securities (e.g., stocks and bonds) at a price not exceeding the market price (Article 207(9)(iii) of the Companies Act).
4. If there is a certification by a certified public accountant or tax accountant that the value determined by the company for the physical investment property is reasonable (Article 207(9)(iv) of the Companies Act).
5. When a loan receivable that is already due and payable to a company is invested at a price that does not exceed the book value of the receivable (Companies Act Article 207(9)(v)).
   ※For example, if a creditor loans 20 million yen to a company and the loan has already become due and payable, and the value of the loan does not exceed the book value of the creditor’s claim against the company, the loan is considered physical investment property, inspector’s investigation is not required.

In the case of DES, it is likely that the inspector will be exempted from inspecting the property in accordance with ⑤ above (Companies Act 207(9)(v)). If the inspector is exempted from inspecting the assets by Companies Act 207(9)(v), the share issuing company’s “account book” must be checked in order to prove that the amount of the share subscription does not exceed the amount stated in the account book during the registration procedures for the issuance of the share for subscription, The “account book” of the share issuing company must be attached to the registration procedure for share for subscription issuance to prove that the amount in the account book has not been exceeded (Article 56(3)(d) of the Commercial Registration Act).

Registration Procedures for Change of Capital Stock (Increase of Capital)

If a company (private company and company without board of directors) has issued new shares by means of a DES procedure by means of an Underwriting Agreement, it is necessary to prepare the following documents for registration, The following documents must be prepared for the registration application.

• Application for Change of Registration
• Shareholder list
• general meeting of shareholders minutes (minutes of the meeting regarding the decision on the offerings and approval of the Underwriting Agreement)
• Underwriting Agreement
• Certificate of capital stock recording (certificate that the invested receivables have been recorded in capital stock)
• General Ledger and other account books (in accordance with Section 207(9)(v) of the Companies Act)
• Power of Attorney for Proceedings (when delegating registration procedures to an agent)

 

How to Reduce Capital Stock after Registration (Capital Reduction Procedure)

What is the Capital Reduction Procedure?

Capital reduction procedure is a procedure to reduce the capital stock of a company. reduction of capital can be divided into two types: “Paid-in capital reduction” and “capital reduction without compensation”. Paid-in capital reduction refers to a procedure in which, upon implementation of the reduction of capital, refunds are also made to shareholders , while capital reduction Paid-in capital reduction refers to a procedure in which the reduction of capital is carried out without compensation to shareholders. However, the current Companies Act eliminates the concept of reduction of capital by delivering money, etc. to shareholders, so “reduction of capital” in the current Companies Act means capital The current Companies Act eliminates the concept of reduction of capital by delivering money, etc. to shareholders, so the term “reduction of capital” under the current Companies Act means capital reduction without compensation. Therefore, in the case of Paid-in capital reduction under the current Companies Act, the capital reduction without compensation should be carried out and the distribution of surplus funded by the increased “other capital surplus” should be carried out. The Paid-in capital reduction under the current Companies Act is therefore a capital reduction without compensation.

Advantages of Performing a Capital Reduction Procedure

If the amount of capital stock increases as a result of an increase in the amount of capital stock, etc., as a result of DES or a regular share issuance, the company receiving the investment may be burdened with the burden of per capital basis of corporate tax and the amount of capital surcharge for pro forma standard taxation.  In addition, if the amount of capital stock exceeds 100 million yen due to the increase of capital, the company will not qualify as a small and medium-sized enterprise, and will not be eligible for the special exception regarding the exemption of family-owned enterprises from the application of the taxation of retained earnings.

The per capital basis of corporate tax is determined based on the amount of capital stock, etc. and the number of employees at the end of the fiscal year, so by reducing the amount of capital stock through the Capital Reduction Procedure, the above tax burden increase may be avoided, Therefore, by reducing the amount of capital stock through the capital reduction procedure, it may be possible to avoid the disadvantages mentioned above, such as an increase in the tax burden. Therefore, a company that is planning to implement an increase of capital should perform the Capital Reduction Procedure in conjunction with the increase of capital procedure and reduce the amount of capital stock by the amount of the increase of capital, The capital stock of a company that intends to increase the amount of capital may be allocated to capital reserve, other capital surplus, etc.

When the Procedure for Issuing New Shares by Cash Investment and the Capital Reduction Procedure are Implemented in Parallel

If the procedure for issuing new shares by cash investment and the Capital Reduction Procedure are conducted in parallel, the procedure will be as follows. The following procedures are based on the assumption that an advance notification to the Bank of Japan under the Foreign Exchange and Foreign Trade Act is required.

Schedule (example)	Procedures at share issuing company
early January	Advance notification to Bank of Japan under the Foreign Exchange and Foreign Trade Act
Mid-January	General meeting of shareholders to approve increase of capital, reduction of capital and Underwriting Agreement
Mid-January	Application for a public notice in the official gazette (a one-month public notice is required as a creditor protection procedure when making a reduction of capital)
Mid-January	Individual notice to known creditors (if creditors exist)
Mid to late January	Execution of an Underwriting Agreement between the underwriters of the offered shares and the share issuing company
Mid to late January	Public notice of reduction in the amount of capital stock is published in the official gazette (①)
From early February onward	Completion of Bank of Japan’s pre-screening procedures (②)
Mid to late Feb. (1 month after ①)	Expiration of time limit for creditor protection proceedings (③)
Mid-February or later (After completion of ② and ③)	Payment of investment by underwriters of the offered shares (④)
Within 10 days from ④.	Submission of reports on overseas remittances of 30 million yen or more
Within 14 days from ④.	Application for registration regarding increase of capital and reduction of capital
Within 45 days from ④.	Execution report to Bank of Japan under the Foreign Exchange and Foreign Trade Act

When the DES Procedure for Issuing New Shares and the Capital Reduction Procedure are Implemented in Parallel

If the DES procedure for issuing new shares and the Capital Reduction Procedure are conducted in parallel, the procedure will be as follows. The following procedures are based on the assumption that an advance notification to the Bank of Japan under the Foreign Exchange and Foreign Trade Act is required.

Schedule (example)	Procedures at share issuing company
early January	Advance notification to Bank of Japan under the Foreign Exchange and Foreign Trade Act
Mid-January	Execution of a Loan Agreement between the underwriters of the offered shares and the share issuing company
Mid-January	General meeting of shareholders to approve increase of capital, reduction of capital and Underwriting Agreement
Mid-January	Application for a public notice in the official gazette (a one-month public notice is required as a creditor protection procedure when making a reduction of capital)
Mid-January	Individual notice to known creditors (if creditors exist)
Mid to late January	Execution of an Underwriting Agreement between the underwriters of the offered shares and the share issuing company
Mid to late January	Payment of loans by underwriters of the offered shares (Creditor) (①)
Mid to late January	Public notice of reduction in the amount of capital stock is published in the official gazette (②)
Within 10 days from ①.	Submission of reports on overseas remittances of 30 million yen or more
From early February onward	Completion of Bank of Japan’s pre-screening procedure (③)
Mid to late Feb. (1 month after ②)	Expiration of time limit for creditor protection proceedings (④)
Mid-February or later (After completion of ③ and ④)	Procedure for performance of INVESTMENT by DES (⑤)
Within 14 days from ⑤.	Application for registration regarding increase of capital and reduction of capital
Within 45 days from ⑤.	Execution report to Bank of Japan under the Foreign Exchange and Foreign Trade Act

Registration Procedures for Reduction of Capital Stock

In the case of simultaneous increase of capitalregistration and reduction of capitalregistration (when the entire amount of capital stock to be increased is reduced of capital), In this case, both the increase of capitalregistration and the reduction of capitalregistration must be performed.

The “registration and license tax” (the fee to be paid to the regional legal affairs bureau) for both the increase of capitalregistration and the reduction of capitalregistration is the sum of the following amounts The total amount of the tax is as follows.

1. increase of capitalregistration: amount of increased capital stock x 0.007 (minimum payment is 30,000 yen)
2. reduction of capitalregistration: 30,000 yen

If a company (private company and company without board of directors) files the Capital Reduction Procedure, it is necessary to prepare the following documents for registration The following documents are required to be prepared for the registration application.

• Application for Change of Registration
• Shareholder list
• general meeting of shareholders minutes (or directors’ decision letter (Companies Act 447(1)(3)))
• A document certifying that a public notice has been given (the original copy of the official gazette in which the public notice was published)
• A written statement certifying that individual notice has been given to the Creditor
• Power of Attorney for Proceedings (when delegating registration procedures to an agent)

 

Services Kuribayashi Sogo Law Office can provide

Kuribayashi Sogo Law Office can assist you with the procedures for investment by domestic and foreign investors, as well as the procedures for the reduction of capital. and foreign investors, and procedures related to the reduction of capital. If you have any questions about investment procedures from domestic and foreign investors or procedures related to the reduction of capital, please do not hesitate to contact us, Kuribayashi Sogo Law Office will be happy to assist you.
To contact Kuribayashi Sogo Law Office, please feel free to call us at 03-5357-1750 (office hours: 9:00 to 18:00) or send us an e-mail form at https://kslaw.jp/contact/.