Proposed revisions to disclosure of strategic shareholdings

Japan is considering revisions to its disclosure rules for strategic shareholdings (also referred to as "policy-held shares", i.e. shares held for reasons other than pure investment), as outlined by the Financial Services Agency (FSA) in November.

These revisions aim to enhance transparency and address concerns about companies reclassifying strategic shareholdings as purely investment-oriented without substantially altering the nature of their holdings. The proposed amendments, which are subject to public consultation, will require expanded disclosures regarding changes in the purpose of shareholding.

Anderson Mori & Tomotsune have published a client note, reviewing the background, the main changes and key points for consideration regarding the implementation of the new rules.

Background of the Revisions

• Existing Disclosure Requirements: Current regulations require listed companies to disclose information about their shareholdings, categorized into "pure investment purpose" and other purposes. The disclosure requirements differ considerably based on the purpose.
• Evolution of Disclosure Rules: The rules for disclosing shareholding information were introduced in 2010, with subsequent revisions in 2019 and 2023, and the FSA has been promoting better disclosure practices.
• Concerns about Misclassification: The 2023 annual securities report review identified companies reclassifying strategic shareholdings as being held for "pure investment purposes" while maintaining a de facto strategic shareholding arrangement. Specifically, this was seen in instances where companies had not agreed on sale timings or where long-term sale plans were absent.
• Corporate Governance Concerns: The "Action Program for Implementing Corporate Governance Reform 2024," published in June 2024, highlighted the lack of transparency regarding changes in the purpose of shareholding and called for improved disclosure.
• FSA Response: The FSA’s "2024 Financial Administration Policy" announced in August 2024, indicated that they would look to enhance shareholding disclosures, which has led to the proposed revisions.

Proposed Amendments

The proposed revisions consist of two main components:

1) Enhanced Disclosure of Shares Reclassified to "Pure Investment Purpose"

• Expanded Timeframe: Companies will need to disclose information on shares reclassified from strategic shareholding to “pure investment purpose” over the last five fiscal years, rather than just the most recent fiscal year.
• Additional Disclosure Items: Besides the current requirements of listing the name of the stock, the number of shares, and the balance sheet amount, companies will also have to disclose the fiscal year in which the reclassification occurred, the reason for the change, and their policy regarding holding or selling the shares after the change.

2) Clarification of "Pure Investment Purpose"

• Definition: The guidelines will be amended to clearly state that "pure investment purpose" means holding shares solely to profit from changes in stock value or dividends.
• Examples of Non-Pure Investment: The amendments include examples of situations that would make it difficult to classify shares as having a “pure investment purpose”, such as when the issuer of the shares holds shares in the reporting company, or when the sale of shares requires the issuer's approval.
• Ambiguity: Some implications of these rules are unclear and will require further clarification during the public comment phase. For example, it is uncertain if common restrictions on share transfers for private companies would be automatically classified as meaning that these holdings are not purely investment oriented.

Key Considerations for Companies

• Review of Past Classifications: Companies need to review their classifications of shareholdings for the past five years, even those not previously subject to disclosure. This will require careful analysis of the reasoning for any prior classification of investments as being made for “pure investment purposes."
• Consistency across Disclosures: Companies must ensure consistency in the stated purpose of shareholdings across different disclosure documents, including annual securities reports, large shareholding reports, and corporate governance reports.
• Potential Impact on Listing Standards: Companies (especially the issuer of the shares) need to assess if reclassifying shares from "pure investment purpose" will require them to exclude those holdings from their "floating shares" as defined by the stock exchange.
• Potential for Share Sales: If companies decide to sell shares as a result of the amended rules, they need to carefully consider various sale methods and legal implications, including securities regulations and insider trading laws.
• Need for Clarification: There is a need for clarity in the definition of "pure investment purpose" in future public comments to prevent companies from excessively and conservatively classifying their holdings.

Conclusion

The proposed revisions to policy-held share disclosure rules represent a significant step toward enhanced transparency in the Japanese market. Companies need to carefully review their existing practices and be prepared to make necessary adjustments to their disclosure documents. Careful consideration must be made of the potential implications of these revisions, particularly in relation to the definition of pure investment purpose. The public comment period will be important to achieve clarity and reduce the likelihood of companies taking an overly conservative approach to classification. Furthermore, the public comment process may also refine the proposals. The effective date is currently planned to be for financial statements closing on or after March 31st, 2025.

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