I. Introduction
The large shareholding reporting system in Japan (the “Large Shareholding Reporting System”) was introduced in 1990, and has not been the subject of significant amendment since 2006.

However, in response to environmental changes in capital markets and enhancement of the fairness and transparency of the market, on December 25, 2023, the working group established by the Financial Services Agency (the “FSA”) has released a Working Group Report regarding the Tender Offer and Large Shareholding Reporting System (the “FSA Report”) in which the working group pointed out issues concerning the current tender offer and the Large Shareholding Reporting System and suggested some amendments thereto. In light of the suggestions in the FSA Report, the amendments (the “Amendments”) to the Financial Instruments and Exchange Act (the “FIEA”) were proposed and passed by the Diet on May 15, 2024. Since the Amendments may have a material impact on the practice of the Large Shareholding Reporting System, we are introducing an outline of these Amendments in this newsletter, as well as a recent enforcement case brought against a failure to submit a large shareholding report.

The Amendments related to the Large Shareholding Reporting System will be effective within two years from the date of their announcement. It should be noted that while the detailed rules of the Reporting System are prescribed in the FIEA enforcement order (the “Enforcement Orders”) and the Cabinet office ordinances related thereto (the “Cabinet Office Ordinances”), the proposed amendments of the Enforcement Orders and Cabinet Office Ordinances are being discussed and will be released before the effective date of the Amendments.

II.          Overview of the Amendments

(i)                Scope of the “Material Proposals” (Juyo-teian-koui)

Since institutional investors repeatedly and continuously sell and purchase stock certificates (including shares in a listed company and defined in the FIEA) in the course of their day-to-day operations, the FIEA allows such institutional investors to use a special reporting system, in which the rules on the frequency and the period for submitting large shareholding reports and changes reports are relaxed to a certain extent (the “Reporting Exception System”). However, the Reporting Exception System is not applicable when such stock certificates are held for effecting material changes in or having a material effect on the business activities of the issuing company (collectively, “Material Proposals”).

Because a narrower and more clearly-defined scope for Material Proposals would facilitate engagement between an issuing company and investors, the FSA Report suggests (i) that proposal concerning acts directly related to management control be deemed Material Proposals, but (ii) that a proposal concerning acts not directly related to management control be deemed Material Proposals only where the manner of such proposal is such that the proposal’s adoption is not left to the management of the issuing company.

While the explanatory materials related to the Amendments published by the FSA indicated that proposals unrelated to management control such as change of the dividend policy or capital policy of the issuing company are not included in the scope of Material Proposals, how exactly this scope will be amended is not clear from the language of the Amendments. The details thereof are expected to be addressed in the amendments to the Enforcement Orders and the Cabinet Office Ordinance.

(ii)              Scope of the Joint Holder

Under the Large Shareholding Reporting System, where there are multiple holders of stock certificates who agree to jointly conduct acquisition or disposal of such stock certificates and exercise shareholder’s rights such as voting rights, such shareholders are treated as substantive joint holders. Because joint holder status affects whether shareholders are deemed to exert an influence on the management of the issuing company, the Amendments suggests that a shareholder be excluded from joint holder status if the following requirements are met:

• All of the holders are Financial Instruments Business Operators (defined in the FIEA), banks or other persons to be specified in the Cabinet Office Ordinances.
• The purpose of the agreement does not constitute a Material Proposal; and
• The agreement is an agreement to jointly exercise voting rights or other rights (which agreement shall be limited to an agreement specified in the Cabinet Office Ordinances).

As in the case of the scope of the Material Proposals, the detailed rules of the scope of the joint holders are expected to be clarified in the amendments to the Enforcement Orders.

III.         Enforcement to breach of the Large Shareholding Reporting System

The amendments of the FIEA in 2008 introduced the imposition of administrative monetary penalties on persons who fail to submit a large shareholding report and/or make a false statement therein. Nonetheless, there have only been eight cases of the imposition of such penalties for the period between 2008 and May 2024. The FSA Report pointed out that many shareholders who are obligated to file a large shareholding report fail to do so, and the Large Shareholding Reporting System is not routinely enforced. Recently, there have been cases in which multiple shareholders were accused of implicitly cooperating to acquire shareholdings in an issuing company, taking advantage of the difficulty in accurately ascertaining the details of the agreements between shareholders in order to identify them as joint holders (so-called “wolfpack tactics”). In a notable case where the Japanese Supreme Court decided in 2022 that the takeover defense measures used by Mituboshi Co., Ltd. (“Mitsuboshi”) were in violation of the Companies Act, the activist fund who had acquired the shares in Mitsuboshi implicitly cooperated to acquire such shares with multiple shareholders. This case, which attracted a great deal of attention, was also an example of the wolfpack tactics mentioned above.

In light of the foregoing, the Securities and Exchange Surveillance Commission (the “SESC”) announced on June 28, 2024 its recommendation to the Commissioner of the FSA to issue an order to pay an administrative monetary penalty for non-submission of a large shareholding report and false statements in a change report in relation to the shares in Mitsuboshi. In accordance with this recommendation, the Commissioner of the FSA has decided to impose an administrative monetary penalty of JPY 320,000 on one of the shareholders subject to this recommendation as of Augst 28, 2024. It is notable that this is the first case where an administrative monetary penalty was imposed solely for a violation of the requirement to submit a large shareholding report.

IV.         Conclusion

In addition to the above, the Amendments include material changes which would have impact on the practice of the Large Shareholding Reporting System; however, as mentioned above, it should be noted that the details of the Amendments will be clarified in the upcoming amendments to the Enforcement Orders and Cabinet Office Ordinances. We recommend keeping an eye on the developments with respect to these further amendments to the related orders and regulations, as well as changes to the practice of the Large Shareholding Reporting System.

Moreover, it will be important to monitor the FSA’s enforcement of the Reporting System after the Mitsuboshi case, as this may have an impact on foreign investors holding stock certificates for listed companies.

Author: Yoshitaka Kato