Japan Shareholder Reporting Reform

By: Yuki Sako

The Japanese government is currently considering (i) several amendments to the large shareholding reporting requirement, which is generally triggered when the position of a beneficial owner reaches 5% of outstanding shares, and (ii) a new mechanism to provide transparency around beneficial owners even when the 5% threshold is not reached. Notably, the stated purposes of these considerations include promoting engagement between companies and investors by removing obstacles for investors to effectively engage with companies and by making it easier for companies to identify beneficial owners.  

More specifically, the following items are currently considered at the Financial Council, a government advisory body which makes policy recommendations:

• Amendments to the large shareholding reporting rule:
  • Disclosure should be required with respect to long positions in equity derivatives such as total return swaps and CfDs, whose underlying assets are covered shares, even if settlement by delivery of shares is not expected;
  • The scope of “joint holders,” which include other holders with whom a holder has agreed to jointly exercise voting rights and other rights, should be narrowed to allow investors to participate in collective or collaborative engagement along with other investors; and
  • While, currently, certain exempt reporting regime is available when certain conditions are met, including the purpose of shareholding not being to engage in an “act of making material proposal,” the scope of “act of making material proposal” should be narrowed to allow effective engagement.
• Introduction of beneficial ownership transparency: the Financial Council is considering the following two “models”:
  • US model: Form 13F filing
  • UK model: Company’s right to inquire beneficial owners under Section 793 of the UK company law

It is expected that the Financial Council will issue formal recommendations in the next few months, which could then be included in the 2024 legislative package to be considered at the national legislature in spring of 2024. Currently, many investors and managers, especially those who are located outside of Japan, hold Japanese shares in the name of a nominee due to operational necessity, and the nominee’s name is registered as shareholder in companies share ledgers. As a result, under the current regime, unless the 5% threshold is crossed, beneficial owners are not disclosed. The beneficial ownership transparency, if introduced, may have significant impact on the manager and investor communities including potential exposure to various risks.