PLC Global Finance update for March 2010: Japan

Practical Law UK Articles 3-501-8055 (Approx. 4 pages)

PLC Global Finance update for March 2010: Japan

by Atsumi & Partners

Companies and corporate governance

Additional disclosure items concerning corporate governance

On 12 February 2010, the Financial Services Agency of Japan (FSA) proposed amendments to the Cabinet Office Ordinance on Disclosure of Corporate Information, etc.

These proposals were in response to a report by a study group on the internationalisation of Japanese financial and capital markets setup by the FSA. The report stated that, given the increasingly global nature of the capital markets, it is necessary for corporate governance to be sufficiently acceptable to both domestic and foreign investors as well as to maintain confidence at an international level.

The amendments proposed by the FSA would require disclosure of the following matters about the corporate governance of a company in its security reports:

Structure of corporate governance:
- An outline of the governance system of the company and the reason for selecting such system.
- Whether or not a statutory auditor with expert knowledge of finance and accounting is appointed.
- The state of co-ordination between outside directors/outside statutory auditors and departments in charge of internal control and internal auditing of the company.
- The reason for not appointing outside directors, if relevant.
Remuneration of directors and statutory auditors:
- The amount of remuneration and directors'/statutory auditors' names and a breakdown by the type of payment, if each of their remunerations for the relevant fiscal year is JPY100 million or more.
- The total amount of remuneration paid to each type of director and statutory auditor.
- An explanation of the company's remuneration policies for its directors/statutory auditors, and the way they are determined, if such policies are put in place.
Cross-shareholdings:
- For shares which the company holds primarily for any strategic purposes (for example, reciprocal or multilateral cross-shareholdings), the list of issues:
- within the top thirty largest amounts on the latest balance sheet of the company; or
- whose amounts reported on the balance sheet exceeds 1% of the capital in either the latest or the preceding fiscal year.
Also the number of shares held by the company.
- For shares which the company holds solely for the purpose of realising direct investment gains, the total amounts on the balance sheet of the latest and the preceding fiscal years.
Voting results:
For results of resolutions at shareholders' meetings, the number of votes cast for, against or withheld, including a separate tabulation in respect of nominee votes.

The FSA sought public comment on these proposals by 15 March 2010 and the amendments will come into effect at the end of March 2010.

Financial institutions

Act on Provisional Measures for the Facilitation of Financing to Small and Medium-Sized Enterprises

The Act on Provisional Measures for the Facilitation of Financing to Small and Medium-Sized Enterprises (Moratorium Act) came into effect on 4 December 2009. It aims to mitigate the risk of bankruptcy of small and medium-sized enterprises (SMEs) and residential mortgage borrowers.

The Japan Financial Services Agency (FSA) also amended its supervisory guidelines (Supervisory Guidelines) and inspection manuals (Inspection Manuals) to conform to the provisions of the Moratorium Act.

This article explains the contents of the Moratorium Act, the Supervisory Guidelines and the Inspection Manuals.

The Moratorium Act

The contents of the Moratorium Act. Key provisions of the act include:

Responsibility of financial institutions to provide credit. The Moratorium Act requires financial institutions to endeavour to provide new credit to SMEs, to endeavour to take steps to alleviate any burden of debt they face and to postpone repayment of debt by SMEs and residential mortgage borrowers.
These provisions do not impose legal obligations on financial institutions but just request financial institutions to make best efforts.
Other obligations of financial institutions. In addition, the Moratorium Act imposes the following obligations on financial institutions:
- to develop internal systems as required to fulfil the responsibilities of financial institutions to provide credit;
- to disclose information to the public regarding compliance with the obligations referred to in the first bullet point above and the development of internal systems referred to in the preceding sub-bullet point; and
- to report to the FSA on implementation of these.
If a financial institution makes false statements or provides false information, a criminal penalty will be imposed on them.
Administrative measures. The FSA will summarise the reports provided by financial institutions and publish such summaries on a regular basis.

Foreign banks. The above provisions of the Moratorium Act do not apply to Japanese branches of foreign banks.

Temporary act. The Moratorium Act is a temporary act with one year term limit.

The Supervisory Guidelines

The Supervisory Guidelines of the FSA require banks to classify their bank loans as one of the following:

Performing loans.
Loans requiring monitoring.
Dangerous loans.
Claims in bankruptcy.

Before the amendments a 'Loan with loan conditions relaxed' constituted a 'loan requiring monitoring' under the Supervisory Guidelines immediately on relaxation of the conditions. However, according to the amended Supervisory Guideline, a loan to an SME is excluded for up to one year from the date of the relaxation of the conditions from classification as a 'Loan with loan conditions relaxed'.

This amendment to the Supervisory Guideline makes it easier for banks to relax the loan conditions on their loans to SMEs.

The Inspection Manual

The Inspection Manual's focus is on reviewing the efforts of financial institutions to enhance the financing and support of SMEs.

The points reviewed are:
Internal rules.
The appointment of persons in charge.
Reports to the board of directors and statutory auditors.
Internal audits on the status of implementation.

PLC Global Finance update for March 2010: Japan | Practical Law