FAQ on Financial Instruments and Exchange Act

Section 5 Large shareholding reporting system

Q1.

What is the large shareholding reporting system?

A1.

The large shareholding reporting system requires a person who has become a Large Shareholder of Share Certificates, etc. issued by a Listed Company, etc. to disclose the status of shareholding by submitting a Large Shareholding Report within a prescribed period. The purpose of this system is to enhance the fairness and transparency of the market and protect investors by promptly providing investors with information on large volume holding of Listed Share Certificates, etc., which is important investment information from the viewpoint of the influence on business management, etc.Large Shareholder as a result of the holder’s Holding Ratio of Share Certificates, etc. exceeding 5% must submit a Large Shareholding Report within five business days from that day, in principle (Article 27-23(1) of the FIEA). If, the Holding Ratio of Share Certificates, etc. increases or decreases by 1% or more after submitting a Large Shareholding Report, the holder must submit a Change Report within five business days from that day, in principle (Article 27-25(1) of the FIEA).

3.

Multiple holders of Share Certificates, etc. who agree to jointly conduct acquisition or disposal of Share Certificates, etc. and exercise of shareholder’s rights such as voting rights are treated as Joint Holders. When calculating the Holding Ratio of Share Certificates, etc. of a holder, the Number of Share Certificates, etc. Held by the Joint Holders must be included in the calculation (Article 27-23(4) and (5) of the FIEA). If holders are husband and wife, a parent company and a subsidiary, or in a similar relationship where they are highly likely to agree on joint holding, they are deemed to be Joint Holders (Article 27-23(6) of the FIEA).

4.

A Large Shareholding Report is made available for public inspection for five years from the day of submission at the competent local finance (branch) bureau or the Okinawa General Bureau, and the Financial Instruments Exchange where the Share Certificates, etc. are listed or the Authorized Financial Instruments Firms Association where the Share Certificates, etc. are registered for over-the-counter trading (Article 27-28(1) of the FIEA). It can also be viewed on the Internet through the electronic disclosure system (EDINET: Electronic Disclosure for Investors’ NETwork).

Q2.

What is the exceptional reporting system?

A1.

Under the large shareholding reporting system, a holder who newly holds a large volume of Share Certificates, etc. or whose holding status has changed in a certain manner must submit a Large Shareholding Report or a Change Report within five business days, in principle.

2.

However, for institutional investors, etc. that repeatedly and continuously sell and purchase Share Certificates, etc. in their daily operations, a requirement to disclose detailed information upon each transaction would be an excessive administrative burden. Therefore, the rules on the frequency and the period for submitting Large Shareholding Reports and Change Reports are relaxed to a certain extent for such investors, while taking into account that such measure would not impede the transparency and fairness of Securities transactions (exceptional reporting system).

3.

The Share Certificates, etc. subject to the exceptional reporting system are those held by the following (Article 27-26(1) of the FIEA; Article 11 and Article 14 of the Cabinet Office Ordinance on Disclosure of the Status of Large Volume Holding of Share Certificates, etc. [hereinafter referred to as the “Cabinet Office Ordinance on Large Volume Holding”]):

(i)

securities companies;

(ii)

those that conduct Investment Management Business;

(iii)

banks;

(iv)

trust companies;

(v)

insurance companies;

(vi)

Norinchukin Bank;

(vii)

Shoko Chukin Bank;

(viii)

those that conduct securities business, Investment Management Business, banking business, trust business, or insurance business in a foreign state under the laws and regulations of a foreign state;

(ix)

Banks' Shareholdings Purchase Corporation;

(x)

those other than (i) through (ix) above who have any person set forth in (i) through (ix) above as a Joint Holder;

(xi)

the national government or a local government; and

(xii)

those other than the national government or a local government who have either the national government or a local government as a Joint Holder.
However, the exceptional reporting system does not apply in the following cases:

• (1)if any person set forth in (i) through (ix) holds Share Certificates, etc. for conducting an act of effecting material changes in or having a material effect on the business activities of the Issuer of said Share Certificates, etc. (Act of Making Important Suggestion, etc.; see Q 132) (Article 27-26(1) of the FIEA); or

• (2)if any person set forth in (i) through (ix) has a Joint Holder other than those set forth in (i) through (ix) whose Holding Ratio of Share Certificates, etc. exceeds 1% (Article 13(i) of the Cabinet Office Ordinance on Large Volume Holding).

Q3.

What are the specific time limits and frequency of exceptional reporting?

A.

The time limit and frequency of exceptional reporting are within five business days from the Reference Date that is set roughly every two weeks (Article 27-26(3) of the FIEA). The specific method of setting the Reference Date is that the Holder of Share Certificates, etc. Subject to Special Provisions chooses the combination of either (i) the second and fourth Mondays of every month (in a month that has a fifth Monday, the second, fourth, and fifth Mondays) or (ii) the 15th day and the last day of every month, and notifies the Prime Minister thereof (Article 27-26(3) of the FIEA; Article 14-8-2(2) of the FIEA Enforcement Order; Article 18(1) and Form 4 of the Cabinet Office Ordinance on Large Volume Holding).

Q4.

Why does the FIEA provide that exceptional reporting is not applicable to the case where Share Certificates, etc. are held for conducting an act of effecting material changes in or having a material effect on the business activities of the Issuer of said Share Certificates, etc. as specified by Cabinet Order (Act of Making Important Suggestion, etc.)?

A1.

For institutional investors, etc. that repeatedly and continuously sell and purchase Share Certificates, etc. in their daily operations, a requirement to disclose detailed information upon each transaction would be an excessive administrative burden. Therefore, they are subject to exceptional reporting with somewhat relaxed rules on the frequency and the period for submitting reports.

2.

However, exceptional reporting is not applicable when Share Certificates, etc. are held for conducting an act of effecting material changes in or having a material effect on the business activities of the Issuer of said Share Certificates, etc. (Act of Making Important Suggestion, etc.), from the viewpoint of preventing use of the system in a manner that distorts the purpose of the system (Article 27-26(1) of the FIEA).

3.

The specific act that constitutes an Act of Making Important Suggestion, etc. is to suggest any of the following matters pertaining to the Issuer or its Subsidiary Company to its shareholders meeting or officers (Article 27-26(1) of the FIEA; Article 14-8-2(1) of the FIEA Enforcement Order; Article 16 of the Cabinet Office Ordinance on Large Volume Holding):

(i)

disposal or acceptance of assignment of important properties;

(ii)

borrowing in a significant amount;

(iii)

selection or removal of a representative director;

(iv)

important changes in the composition of officers;

(v)

appointment or dismissal of a manager or any other important employee;

(vi)

establishment, changes or abolition of a branch office or any other important organization;

(vii)

share exchange, share transfer, or company split or merger;

(viii)

assignment, acceptance, suspension, or abolition of the business in whole or in part;

(ix)

important changes in the policy concerning dividend distribution;

(x)

important changes in the policy concerning the increase or reduction of the amount of stated capital;

(xi)

delisting from a Financial Instruments Exchange or rescission of registration with an over-the-counter market;

(xii)

listing on a Financial Instruments Exchange or registration with an over-the-counter market;

(xiii)

important changes concerning the capital policy (excluding (x) above);

(xiv)

dissolution (excluding dissolution as a result of a merger); or

(xv)

the filing of a petition for commencement of bankruptcy proceedings, commencement of rehabilitation proceedings, or commencement of reorganization proceedings.
Large Shareholding Report (Article 27-23(1) of the FIEA; Article 2 and Points to Note in Preparing Statements of Form 1 of the Cabinet Office Ordinance on Large Volume Holding), and state the contents of the Act of Making Important Suggestion, etc. as specifically as possible (Points to Note in Preparing Statements of Form 1 of the Cabinet Office Ordinance on Large Volume Holding).

Q5.

What is the treatment for the case of conducting transactions that result in the Holding Ratio of Share Certificates, etc. of an institutional investor, etc. that uses the exceptional reporting system falling below 10% from above the 10% level?

A1.

It had been pointed out that under the previous system, when an institutional investor that held over 10% of the outstanding total conducted transactions that make the holding ratio fall below 10% in a short term, such information would be important for other investors and shareholders in making Investment Decisions, but it took time until such information was disclosed due to the application of the exceptional reporting system.

2.

Due to such criticism, the current system does not apply exceptional reporting for a Change Report in such a case, and obligates the institutional investor, etc. to submit a Change Report through general reporting within five business days, in order to secure increased transparency for other investors (Article 27-26(2)(iii) of the FIEA; Article 8 and Article 12 of the Cabinet Office Ordinance on Large Volume Holding).

Q6.

What is the treatment for the case where the Share Certificates, etc. held by a holder and a Joint Holder overlap in calculating the Holding Ratio of Share Certificates, etc.?

A1.

In calculating the Holding Ratio of Share Certificates, etc., any overlap in the Number of Share Certificates, etc. Held between a holder and a Joint Holder is to be deducted (Article 27-23(4) of the FIEA).

2.

Specifically, Share Certificates, etc. for which there exists any of the following rights between the holder and the Joint Holder (including between the Joint Holder and another Joint Holder) are to be deducted from the Number of Share Certificates, etc. Held of the person holding such right (Article 27-23(4) of the FIEA; Article 14-6-2 of the FIEA Enforcement Order):

(i)

a right to request delivery of Share Certificates, etc. under sales and purchase or any other contract;

(ii)

a right to exercise the voting right as a shareholder or investor of the Issuer of the Share Certificates, etc. or a right to give instruction with regard to the exercise of such voting right under a money trust contract or any other contract or the provisions of laws;

(iii)

a right required for making investments in Share Certificates, etc. based on a Discretionary Investment Contract or any other contracts or the provisions of laws;

(iv)

a right to complete the sales and purchase of Share Certificates, etc. and to acquire the position as a buyer under the pre-contract of the sales and purchase of Share Certificates, etc. exercisable by one party; and

(v)

a right where the person who has exercised the option pertaining to sales and purchase of Share Certificates, etc. acquires the position as a buyer through such exercise of the option (a call option).

Q7.

Are investment securities issued by investment corporations subject to the large shareholding reporting system?

A1.

Investment securities issued by an investment corporation are securities for which the investor has voting rights (Article 2(14) through (16) and Article 77(2)(iii) of the Act on Investment Trusts and Investment Corporations), which could lead to acquisition of the controlling interest in the investment corporation.

2.

Therefore, Securities subject to the large shareholding reporting system include Investment Securities, etc. (Article 27-23(1) of the FIEA; Article 14-4(1)(iii) of the FIEA Enforcement Order). Accordingly, holders of investment securities issued by investment corporations are also obligated to submit Large Shareholding Reports.

Q8.

Must the disclosure documents under the large shareholding reporting system be submitted through the electronic disclosure system (EDINET)?

A1.

The large shareholding reporting system obligates submission of Large Shareholding Reports, Change Reports, and Amendment Reports through the electronic disclosure system (EDINET: Electronic Disclosure for Investors’ NETwork) (Article 27-30-2 and Article 27-30-3(1) of the FIEA).

2.

Reports submitted through EDINET are made available for public inspection on the Internet (Article 27-30-7 of the FIEA; Article 14-12 of the FIEA Enforcement Order).