Japan’s first Accelerated Share Repurchase (ASR) transaction

Major legal issues

Companies Act Procedure Regulations on Share Repurchase

Two share repurchase transactions exist in FCSR transactions. No shareholder resolution is required in either case.※3

Purpose of Share Repurchase Regulations

Why isn’t a special resolution of shareholders meeting required when market transactions are used for stock repurchases (Article 165 of the Companies Act)?

Regulations on stock repurchases from specific shareholders (Article 160 of the Companies Act) and the principle of shareholder equality

The Companies Act stipulates strict procedures for the acquisition of treasury stock from specific shareholders, such as a special resolution of the general meeting of shareholders:

Acquisition of Shares without consideration

Article 27, Item 1 of the Enforcement Regulations of the Companies Act does not impose any restrictions on procedure or distributable amount with respect to the free acquisition of treasury stock:

　⇒　As long as any consideration is not paid by the Issuer, the acquisition of treasury stock does not have a harmful effect on the Issuer.

In cases where treasury stock is acquired without consideration, the stock acquisition right granted to allottee does not satisfy its exercise conditions and expires.

The issuance of stock acquisition rights does not impose any expenses on the Issuer, and the potential dilution of the value of shares held by existing shareholders should be considered under the Companies Act. When acquiring shares without consideration, stock acquisition right will expire without being exercised, so there will be no financial expenses to be borne by the Issuer or dilution to share value.

When considered in light of the entire transaction, the Issuer’s acquisition of its own shares is considered essentially “free”.

Regulation of distributable amounts under the Companies Act

No additional cash is paid by the Issuer in subsequent adjustments of FCSR transactions.

The “Total book value of money, etc. to be delivered to shareholders,” under Article 461, Paragraph 1 of the Companies Act, can be calculated as of the date when the repurchase of treasury stock is conducted through ToSTNeT-3.

Calculation of Distributable Amount after Initial Acquisition and Adjustment Transaction

The total repurchase price of the relevant treasury stock is fixed in the initial transaction at the repurchase of treasury stock through ToSTNeT-3.

The amount available for distribution will not decrease in subsequent adjustment transactions (there will be an increase of only 1 yen if any stock acquisition right is exercised).

Integration of Stock Acquisition Right and Right Pertaining to Acquisition without Contribution

In FCSR transactions, the Issuer’s right to acquire shares without consideration is extinguished when the stock acquisition right is exercised (when the stock price rises), and the stock acquisition right is extinguished when the Issuer acquires its own shares without consideration (when the stock price falls).

This reciprocal structure ensures that the stock acquisition right and the right to acquire shares without consideration are considered as indivisible.

Valuation of stock acquisition rights

The allottee’s position in the FCSR transaction is just to make a settlement based on stock price increases or decreases up to a certain point in the future. Because the stock price can fluctuate either upward or downward as mentioned above, the allottee’s position is neutral and does not have any positive value. If both the stock acquisition right and the Issuer’s right to acquire shares without consideration are valued together, the value is zero.

The stock acquisition right is issued based on the valuation by a third-party valuator.

Therefore, it does not fall under the category of “specially favorable conditions” (Article 238, Paragraph 3, Item 1 and Article 240, Paragraph 1 of the Companies Act), which requires a special resolution of a general meeting of shareholders.

Issue of stock acquisition rights without consideration in other situations

Allotment of stock acquisition rights

In an FCSR transaction, an allotment agreement of the stock acquisition right is executed. In principle, under the Companies Act, the board of directors of the Issuer has the discretion to determine the party to whom stock acquisition rights are allotted and with whom the agreement to acquire shares free of charge is entered into, provided that such allotment is not made under specially favorable conditions. Existing shareholders do not have preemptive rights with respect to such allotment, but FCSR transactions are designed to have zero value for the allottee, as noted above.

In order to comply with insider trading regulations, the Issuer must disclose all material facts prior to the ToSTNeT-3 repurchase of its own shares.

Announcement of details of each step of the transaction must be made:

• First, a formula for the number of shares to be delivered upon exercise of the stock acquisition right and the number of shares to be delivered upon execution of free acquisition is disclosed.
• Second, the number of shares acquired from the Financial Instruments Business Operator (i.e., the number of shares subject to adjustment) is disclosed at the time of announcement of the outcome of share repurchases through ToSTNeT-3.

Conclusion

In ASR transactions, the effects of share repurchases in the capital market, and therefore also the shareholder returns, can be quickly realized. In the U.S., Apple Inc. and other major companies commonly implement accelerated share repurchases. For many Japanese companies seeking to enhance shareholder returns and improve capital efficiency, smooth and reliable implementation of share repurchases is an important capital policy issue, and ASR transactions remain an effective option for such purposes.