Comprehensive Explanation of Stock Acquisition Rights in Japanese Corporate Law

The “Stock Acquisition Rights” under Japanese Corporate Law (会社法) are an extremely important financial instrument utilized by companies to achieve a variety of objectives such as fundraising, organizational restructuring, and providing employee incentives. These rights refer to the ability to acquire new shares of a company under certain conditions. Stock Acquisition Rights are not limited to a single purpose but function as a flexible means to achieve a company’s diverse strategic goals. The wide range of possible applications is the reason why Japanese companies extensively use Stock Acquisition Rights.

This article comprehensively explains the legal nature, issuance, allocation, management, transfer, exercise, and eventual expiration of Stock Acquisition Rights based on Japanese Corporate Law. It is particularly aimed at English speakers who are learning Japanese, and while using Japanese terms, it strives to present the concepts in a clear and easily understandable manner. Stock Acquisition Rights, while being independent rights, also hold the potential to become shares in the future, which gives them a unique nature different from bonds or stocks. This personalityistic is significant for companies considering various options in fundraising. Japanese Corporate Law provides companies with a certain degree of flexibility in designing and utilizing Stock Acquisition Rights, while also detailing the entire process from issuance to expiration to protect existing shareholders and investors. This legal framework serves as the foundation for balancing the freedom of companies to engage in innovative fundraising and organizational restructuring with reliability in the market and transparency to investors.

Monolith Law Office possesses deep expertise and extensive practical experience in Japanese Corporate Law, particularly regarding Stock Acquisition Rights, and provides optimal legal advice to clients both domestically and internationally. We hope this article will serve as an aid in deepening the understanding of Stock Acquisition Rights in Japanese corporate legal affairs.

The Legal Nature and Importance of Stock Acquisition Rights Under Japanese Corporate Law

Stock Acquisition Rights in Japan refer to the right to demand the issuance of shares from a corporation. This definition is explicitly provided in Article 2, Paragraph 23 of the Japanese Companies Act. Stock Acquisition Rights are independent rights that are not shares themselves and represent securities with a unique legal nature, distinct from bonds or shares. As they are rights to acquire shares in the future, they do not confer current shareholder rights such as voting or dividend claims. The basic framework for Stock Acquisition Rights is set out in Chapter 5 of the Second Part of the Companies Act (Article 236 and subsequent articles), which covers the entire lifecycle of Stock Acquisition Rights, including issuance, management, transfer, exercise, and extinction.

Stock Acquisition Rights become shares only when exercised and are different from shares themselves. Shares represent a part of the ownership of a company and come with rights and obligations as a shareholder, whereas Stock Acquisition Rights are merely potential future share acquisition rights. This distinction is particularly important for foreign investors, as understanding the clear difference between the potential for future share acquisition that Stock Acquisition Rights hold and the current status as a shareholder leads to appropriate investment decisions.

Stock options are a type of Stock Acquisition Right, specifically issued as incentives for officers and employees. Although they are collectively treated as “Stock Acquisition Rights” under the Companies Act, the term “stock options” is used in practice, depending on the purpose and the target group. This article will keep the detailed explanation of stock options to a minimum and focus on the system of Stock Acquisition Rights as a whole.

The use of Stock Acquisition Rights in corporations is multifaceted. Firstly, they can be utilized as a means of fundraising. Stock Acquisition Rights are an effective tool for corporations to raise new capital. In particular, when combined with bonds, as in Convertible Bonds with Stock Acquisition Rights, they can meet the diverse needs of investors. Such combinations leverage the flexible financial product personalityistics of Stock Acquisition Rights to the fullest, allowing companies to secure low-cost capital and the possibility of future capital enhancement.

Secondly, they are used in M&A and organizational restructuring. In organizational restructuring (such as mergers or company splits), Stock Acquisition Rights may be used as consideration or designed as rights to acquire shares in the new company after restructuring. This enables the construction of flexible restructuring schemes, demonstrating that Stock Acquisition Rights are not merely tools for fundraising but also important legal instruments for facilitating strategic corporate restructuring.

Thirdly, they serve as incentives for officers and employees. It is common to grant Stock Acquisition Rights to officers and employees to encourage contributions to the enhancement of corporate value. By allowing them to acquire company shares in the future and benefit from any increase in value, it effectively boosts their motivation. Thus, Stock Acquisition Rights have become an indispensable element in supporting the multifaceted growth strategies of companies.

Issuance Procedures and Types of Stock Acquisition Rights in Japan

The issuance of stock acquisition rights in Japan is determined by the company’s governing bodies. As a general rule, a special resolution at the shareholders’ meeting is required (Article 238, Paragraph 2 of the Japanese Companies Act). This reflects the Japanese Companies Act’s emphasis on respecting shareholders’ intentions and prioritizing transparency and shareholder protection, as the issuance of stock acquisition rights can potentially affect the interests of existing shareholders. However, in companies with a board of directors, the shareholders’ meeting can delegate the decision-making authority regarding the issuance of stock acquisition rights to the board of directors (Article 240, Paragraph 1 of the Japanese Companies Act). In this case, the board of directors decides on the issuance conditions within the scope defined by the shareholders’ meeting. For public companies, it is possible to delegate the decision-making authority to the board of directors through an ordinary resolution at the shareholders’ meeting (Article 240, Paragraph 1 of the Japanese Companies Act). This is a special exception to enable rapid fundraising and is designed to accommodate market flexibility. These procedures balance the flexibility of companies in utilizing stock acquisition rights with the protection of existing shareholders.

When issuing stock acquisition rights, it is necessary to determine the following items based on Article 236 of the Japanese Companies Act:

• The number of stock acquisition rights
• The type and number of shares that are the object of the stock acquisition rights
• The value of the property to be contributed upon exercise of the stock acquisition rights or the method of its calculation
• The period during which the stock acquisition rights can be exercised
• Details concerning the increase in capital stock and capital reserve when shares are issued upon exercise of the stock acquisition rights
• Any restrictions on the transfer of stock acquisition rights, if applicable
• Provisions for the company to acquire the stock acquisition rights, if applicable
• Details concerning the gratuitous acquisition of stock acquisition rights
• Conditions for exercising the stock acquisition rights
• Provisions for acquiring the stock acquisition rights
• The right to demand the purchase of stock acquisition rights
• Details concerning the extinguishment of stock acquisition rights
• Issuance of stock acquisition right certificates, if applicable
• The issuance date of the stock acquisition rights
• Issuance of bonds with stock acquisition rights, if applicable
• Conditions for exercising the stock acquisition rights
• Restrictions on the transfer of stock acquisition rights

These items are essential for clarifying the legal nature and rights content of stock acquisition rights and are extremely important in avoiding future disputes. The wide range of issuance items demonstrates the high customizability of stock acquisition rights. For example, exercise price, exercise period, transfer restrictions, and the company’s right to acquire can each be strategically designed to achieve specific corporate goals. Thus, the issuance of stock acquisition rights is not merely a legal procedure but a strategic decision that significantly impacts the company’s capital structure, governance, and relationships with stakeholders.

There are two main types of stock acquisition rights issuance: “paid issuance,” where consideration is required for the acquisition of stock acquisition rights, allowing the company to raise funds, and “gratuitous issuance,” where no consideration is required. The latter is mainly used for providing incentives to officers and employees or for returning benefits to shareholders (shareholder allotment).

Furthermore, stock acquisition rights can be issued in conjunction with bonds (Articles 2, Item 24, and 248 of the Japanese Companies Act). These are known as bonds with stock acquisition rights. Investors can enjoy interest income from the bonds while having the opportunity to benefit from the company’s future stock price appreciation. For the company, this offers the advantages of low-cost fundraising and the potential for future capital enhancement, providing a flexible means to meet diverse financing needs.

Allocation and Management of Stock Acquisition Rights in Japan

The allocation of stock acquisition rights in Japan is carried out based on the offering conditions determined by the decision-making body (either the shareholders’ meeting or the board of directors). There are mainly two methods of allocation:

• Shareholder Allocation: This method allocates stock acquisition rights to existing shareholders in proportion to their shareholding ratio. It prevents the dilution of existing shareholders’ rights.
• Third-Party Allocation: This method allocates stock acquisition rights to specific third parties (for example, certain investors, business partners, officers, employees, etc.). It is widely used for specific purposes such as fundraising, strategic alliances, and incentive provision.

Those who wish to subscribe to the offered stock acquisition rights must apply to the company (Article 242 of the Japanese Companies Act). The company then decides who will be allocated the rights.

The company must record information related to the issued stock acquisition rights in the “Stock Acquisition Rights Register” (Article 249 of the Japanese Companies Act). The register includes the name or designation of the stock acquisition rights holder, address, type and number of stock acquisition rights held, and the date of acquisition. This register serves as the basis for clarifying the rights of the stock acquisition rights holders and for smoothly managing the exercise, transfer, or extinguishment of these rights. Stock acquisition rights holders may request to inspect or obtain a copy of the Stock Acquisition Rights Register from the company (Article 252 of the Japanese Companies Act). This register is not only an internal management tool for the company to track stock acquisition rights but also an important mechanism for ensuring investor protection and transparency. By providing a clear record of ownership and rights, it reduces disputes and facilitates the exercise and transfer of stock acquisition rights. For foreign investors, this record-keeping is a fundamental aspect of legal certainty and due diligence in corporate transactions in Japan.

In cases where a large number of stock acquisition rights are issued or in the case of listed companies, it is common for a transfer agent (such as a securities administration company) to manage the Stock Acquisition Rights Register on behalf of the company. The transfer agent professionally handles administrative processes related to stock acquisition rights, such as transfer registration procedures, acceptance of exercise procedures, and management of extinguishment procedures, supporting smooth communication between the company and the stock acquisition rights holders. The management of stock acquisition rights is not only a legal requirement but also an operational challenge that requires specialized infrastructure (such as transfer agents), especially for large-scale or active companies. This indicates that while the legal framework provides rules, practical implementation often accompanies industry-specific solutions to ensure efficiency, accuracy, and compliance with legal requirements concerning the rights of numerous stock acquisition rights holders.

Transfer and Restrictions of Stock Acquisition Rights Under Japanese Corporate Law

Under Japanese Corporate Law (Companies Act, Article 254, Paragraph 1), stock acquisition rights are, in principle, transferable. This is because they possess the personalityistics of securities, and ensuring their market liquidity is important. Transfers are effected by the delivery of the stock acquisition right certificates when issued, and if no certificates are issued, through the registration of a name change in the stock acquisition rights ledger.

However, a company can restrict the transfer of stock acquisition rights through provisions in its articles of incorporation (Companies Act, Article 254, Paragraph 2). These transfer restrictions can be stipulated as issuance terms of the stock acquisition rights. The main purposes of setting transfer restrictions include stabilizing control of the company, maintaining a specific shareholder composition, or preventing the improper circulation of insider information. In particular, for private companies and startups, these restrictions are used to prevent strategically important stock acquisition rights from unintentionally passing to third parties. To transfer stock acquisition rights with restrictions, the company’s approval is required (Companies Act, Article 254, Paragraph 2). The approving body is the board of directors in companies with such a board, and the shareholders’ meeting in other companies. The legal framework regarding the transferability of stock acquisition rights reflects a deliberate balance between providing liquidity to the holders (thereby making the rights a more attractive financial instrument) and allowing companies to maintain control over their ownership structure. For foreign investors, understanding this balance is crucial, as such transfer restrictions can significantly impact the value of their stock acquisition rights and their exit strategies.

The restrictions on the transfer of stock acquisition rights often become legal issues concerning their validity and operation. The Tokyo District Court decision on March 18, 2008 (Heisei 20), is one of the significant cases regarding transfer restrictions of stock acquisition rights. The decision provided concrete judgments on the validity of transfer restrictions and the scope of legitimate reasons for a company to refuse transfer approval. Generally, for a company to refuse transfer approval, objective and rational reasons are required, such as significantly harming the company’s interests. This decision suggests that there are certain constraints on the exercise of transfer restrictions to prevent their abuse. While the Companies Act permits transfer restrictions, the judiciary plays a crucial role in ensuring that these statutory provisions are not used to unjustly harm the rights holders. The courts’ emphasis on “reasonable grounds” implies that a company’s decisions regarding transfer approval are not absolute but subject to tests of rationality and fairness, protecting rights holders from arbitrary refusals and reinforcing the principle that even corporate powers granted by law must be exercised in good faith and not for improper purposes.

Exercising Stock Acquisition Rights and Their Effects Under Japanese Corporate Law

Holders of stock acquisition rights in Japan can acquire shares of a company by exercising these rights. When exercising, it is necessary to make an exercise request within the exercise period set at the time of issuance. The exercise request is made by submitting the prescribed documents at a location designated by the company and paying the determined exercise price. Although the exercise price is usually in cash, in-kind contributions are also possible (Japanese Companies Act, Article 281).

When stock acquisition rights are lawfully exercised, the holder becomes a shareholder of the company. Consequently, the exercised stock acquisition rights are extinguished, and new shares are issued or treasury shares are delivered. The exercise is a critical moment in the life cycle of stock acquisition rights, fundamentally altering the company’s capital structure and the status of the rights holder. This change has a direct impact on existing shareholders (potential dilution) and the company’s financial statements. For foreign investors, understanding this mechanism is key to assessing the future ownership status and financial health of Japanese companies. The increase in capital stock and capital reserve resulting from the exercise is stipulated in the issuance terms, which is a matter of great importance as it directly affects the company’s financial condition. The conditions for exercising stock acquisition rights are specifically defined at the time of issuance. For example, conditions may include the achievement of certain performance targets, going public, or the passage of a certain period. These rights cannot be exercised unless these conditions are met.

Stock acquisition rights can only be exercised within the set exercise period. Once this period has passed, the rights automatically expire. The exercise period is a significant factor affecting the value of the rights and requires investors to strategize the appropriate timing for exercising their rights within that period. By carefully setting the exercise conditions (such as performance targets or IPO) and the exercise period, companies can align the interests of the rights holders (such as employees or strategic investors) with long-term corporate goals. Thus, stock acquisition rights function not merely as a tool for fundraising but as a dynamic incentive or financing tool. For instance, a long exercise period with performance-based conditions encourages sustained contributions and aligns the interests of management with the long-term creation of shareholder value. This demonstrates how stock acquisition rights can be applied in a sophisticated manner beyond simple fundraising.

Causes for the Expiration of Share Warrant Rights Under Japanese Corporate Law

Share warrant rights in Japan expire upon the achievement of their intended purpose or the occurrence of specific events. The main causes for expiration are as follows:

• Expiration upon exercise: When a holder of share warrant rights exercises these rights and acquires shares, the share warrant rights expire. This is the most common form of expiration.
• Expiration at the end of the exercise period: If the exercise period for the share warrant rights expires without being exercised, the rights automatically expire. Therefore, holders must always be aware of the exercise period.
• Expiration due to acquisition clauses: A company can establish an “acquisition clause” at the time of issuing share warrant rights, which allows the company to acquire the rights upon the occurrence of specific events (Japanese Companies Act, Article 236, Paragraph 1, Item 8, S_S10, S_S11, S_S14). For example, during organizational restructuring such as mergers or company splits, or when it is necessary to maintain a specific shareholder composition, the company can forcibly acquire and extinguish the share warrant rights. In this case, the holder may receive compensation.
• Expiration due to gratuitous acquisition: A company can acquire share warrant rights without compensation and extinguish them through a special resolution at the shareholders’ meeting (Japanese Companies Act, Article 276, Paragraph 1, Item 1, S_S12). This may be used when the value of the share warrant rights has significantly decreased or the purpose for their issuance has been lost.
• Expiration due to demand for extinction: If there is a provision that allows the holder of share warrant rights to demand their extinction from the company, the rights expire upon such a demand.
• Other causes: In the case of bonds with share warrant rights, the rights may expire if the bonds are redeemed or if the benefit of the term is lost. Additionally, the rights may expire if certain conditions set forth in the issuance terms of the share warrant rights are met.

The expiration of share warrant rights has a dual nature: it represents the loss of rights for the holders due to the passage of the exercise period, and it serves as a strategic tool for companies to manage their capital structure through acquisition clauses and gratuitous acquisitions. For companies, various expiration mechanisms (especially acquisition clauses) provide essential flexibility to avoid future dilution or undesirable shareholder compositions. This demonstrates that expiration is not merely the end of rights but a strategically important stage that the company can control under certain conditions. The Japanese Companies Act provides a clear framework for when and how share warrant rights expire, offering legal certainty to both companies and holders. However, within this framework, the law grants companies significant discretion to actively manage share warrant rights through specific clauses (such as acquisition clauses). This means that while holders have clear rights, they must be aware that the company may terminate these rights under pre-agreed conditions, emphasizing the importance of thoroughly understanding the issuance terms.

Key Court Cases on Stock Acquisition Rights Under Japanese Corporate Law

Court cases concerning stock acquisition rights are essential for understanding the interpretation and practical application of the Japanese Companies Act. Below, we introduce several particularly important cases. These cases demonstrate that while the Companies Act is comprehensive, it relies on judicial interpretation to clarify its application in complex and unforeseen situations. Understanding these cases is as crucial as understanding the law itself, as it reveals how the law is actually applied and what risks and protections exist.

Tokyo District Court Decision on March 18, 2008 (Heisei 20) (Validity of Transfer Restrictions & Justifiable Reasons for Refusal of Approval)

The decision by the Tokyo District Court on March 18, 2008 (Heisei 20), addressed the validity of transfer restrictions on stock acquisition rights and the scope of ‘justifiable reasons’ a company may have for refusing to approve a transfer. The key point of the ruling is that a company must have objective and rational reasons for refusing transfer approval, such as significant harm to the company’s interests, and that abstract reasons like ‘undesirability’ are not sufficient grounds for refusal. This serves as an important guideline to prevent the abuse of transfer restrictions and the unjust infringement of the rights of stock acquisition right holders. The significance of this decision lies in how it illustrates the judiciary’s stance on balancing the liquidity of stock acquisition rights with the objective of maintaining control over a company.

Supreme Court Decision on July 19, 2016 (Heisei 28) (Exercise Conditions of Stock Options and the Principle of Shareholder Equality Under Japanese Law)

The decision in question addresses whether the exercise conditions of stock options violate the principle of shareholder equality. The key point of the ruling is that whether specific exercise conditions contravene the principle of shareholder equality should be determined based on whether those conditions have a reasonable purpose and are necessary and appropriate within the scope of achieving that purpose. It suggests that conditions that are merely disadvantageous to certain shareholders do not immediately constitute a violation of the law. This ruling provides crucial criteria for balancing the flexibility in designing stock options with the fundamental principle of shareholder equality as established in Japanese corporate law.

Tokyo District Court Decision on November 29, 2017 (Heisei 29) (Validity of the Stock Option Exercise Price Adjustment Clause)

The case in question involved the validity of the stock option exercise price adjustment clause (for instance, a clause that adjusts the exercise price in the event of stock dilution due to new share issuance). The key point of the decision was that while the exercise price adjustment clause could be recognized within a reasonable range to protect the value of the stock option holder’s rights, the method of adjustment must not unfairly harm the company’s interests. This ruling provided specific guidelines on how to balance the preservation of stock option value with the maintenance of a company’s financial health.

These case laws highlight the tension between various stakeholders involved with stock options (the liquidity of the stock option holder and the company’s control, the rights of the stock option holder and the equality of existing shareholders, the protection of the stock option holder’s value and the company’s financial flexibility). The court’s decision attempts to draw a line between these competing interests. The judiciary actively plays the role of mediator among the various stakeholders related to stock options. The decision demonstrates that while the Companies Act provides basic rules, the courts ensure that these rules are applied fairly and prevent the abuse of authority by either the company or the stock option holders. This role of the judiciary contributes to the stability and predictability of the entire Japanese corporate legal environment, which is an essential element in attracting and maintaining foreign investment.

Below is a summary of the main case laws related to stock options.

Comparing Share Warrants with Similar Concepts Under Japanese Corporate Law

In Japanese corporate law, share warrants possess unique legal personalityistics, but they are sometimes confused with other financial instruments such as shares or stock options. Distinguishing these concepts clearly is essential for their proper understanding and utilization. This is particularly helpful for foreign readers, as similar terms may have different legal meanings. The table below compares the main differences between share warrants, shares, and stock options. Through this comparison, you can clearly understand the uniqueness of share warrants and how they differ from other financial instruments.

Summary

In this article, we have provided a detailed explanation of the entire process of stock acquisition rights under Japanese Corporate Law, from their legal nature to issuance, allocation, management, transfer, exercise, and finally to their expiration. Stock acquisition rights function not merely as a means of fundraising but also as an extremely flexible and powerful tool in corporate growth strategies, organizational restructuring, and the design of personnel incentives. Their diverse applicability is supported by the flexibility of issuance conditions detailed in the Companies Act of Japan and the accumulation of interpretations formed by case law.

However, this flexibility also necessitates complex legal requirements and careful design. The versatility of stock acquisition rights can provide strategic advantages to companies while also bringing legal complexity and potential pitfalls. For foreign companies, this means that while opportunities are presented, specialized legal advice is not only recommended but essential to avoid costly mistakes and unexpected liabilities. In particular, transfer restrictions, exercise conditions, and causes of expiration directly affect the value and exercisability of stock acquisition rights, making it crucial to understand their content accurately.

Monolith Law Office possesses deep expertise in Japanese Corporate Law and extensive practical experience from designing stock acquisition rights to their issuance, management, and dispute resolution. In a dynamic legal environment like Japan’s, where interpretations are formed by case law, relying solely on statutory law is insufficient. Legal advice from experts like Monolith Law Office is extremely important not only to understand the written law but also to interpret its practical application, predict potential issues based on case law, and design legally and strategically effective stock acquisition rights. We promise to provide strategic and practical advice to our domestic and international clients to maximize the use of stock acquisition rights under the Japanese legal system and manage their legal risks appropriately. When faced with complex corporate legal challenges, please consult with our firm.