Large Shareholding Reports (the 5% Rule)

General

A shareholder whose ownership percentage exceeds 5% in a publicly listed company is required to publicly disclose the details by submitting a Large Shareholding Report within five business days.

Any subsequent increase or decrease of 1% or more must also be disclosed by an Amendment Report within five business days.

Shareholding ratios

Under the FIEA, a “holder” of shares include any individual or entity that has the legal or beneficial ownership of the shares or is authorized to make investment decisions on behalf of a fund.

Individuals or entities with the authority to provide voting instructions may be regarded as a ‘holder’ if they intend to influence the management of the issuer.

A holder of a long position in a cash-settled equity derivative may also be regarded as a ‘holder,’ depending on their intent.

Shareholdings by ‘co-holders’ must be aggregated. “Co-holders” include:

• related parties (e.g., entities that control, are controlled by, or are under common control with the holder, as well as a spouse in the case of a natural person)
• parties acting in concert with respect to the acquisition or disposal of those shares, or the exercise of voting or other shareholder rights

The formula for calculating the shareholder ratio can be complex, particularly when the issuer has special classes of shares, stock options, convertible bonds, or other convertible securities.

Form of report

These reports must be prepared in the designated format, in Japanese, and must include:

• Purpose of holding the securities
• Summary of any material agreements related to those securities
• Source of funding for the purchase
• Purchases/Sales of the issuer’s securities in hte past 60 days (including the price)
• Details of ‘co-holders’ (see above)

The form must be submitted through EDINET (the Electronic Disclosure for Investors’ NETwork) and will be immediately made available to public.

Related legal reforms

Currently, there is no means under Japanese law to identify beneficial owners of 5% or less. Legislative reform is being considered to grant companies the right to request information from custodians regarding the beneficial owners of shares.

( See post on Companies Act reform)

There have also been amendments to the FIEA to clarify what types of ‘collaborative engagement’ will not cause institutional investors to be considered as acting in concert.

( See post on TOB and 5% disclosure)

Caveat

The rules under the FIEA for calculating the shareholding ratios and aggregating shareholdings among related parties and other parties acting in concert are highly technical. Additionally, drafting a Report and submitting it through EDINET will require some lead time. You should seek legal advice if you intend to make a substantial investment in a listed company.

 Related: Shareholder Rights