PLC Global Finance update for April 2010: Japan

Practical Law UK Articles 7-502-0259 (Approx. 5 pages)

PLC Global Finance update for April 2010: Japan

by Atsumi & Partners

Capital markets

FSA of Japan provides clarification regarding the application of tender offer rules

At the end of March 2010, the Financial Services Agency of Japan (FSA) published its views (in Q&A format with additional commentaries) on the application of the tender offer rules contained in the Financial Instruments and Exchange Law (FIEL) to shares, call options and certain other securities (relevant securities). The views expressed by the FSA apply equally to acquisitions or offers of relevant securities , by or to, non-Japanese entities, as well as Japanese entities.

The key points from the FSA are set out below.

M&A

Generally, there is no need to purchase by tender offer where either a company or a shareholder of such company receives relevant securities as a result of the entrance by the company into a merger, share exchange or other organisational-change type M&A transaction.

However, transfers relevant securities that are made in the course of an M&A transaction but which effectively constitute a negotiated sale and purchase of the relevant securities (for example, a company split under which relevant securities in a third company are the only transferred assets) are subject to the tender offer rules.

Exercise of options

Generally, the tender offer rules apply to the transfer of relevant securities under the exercise of a call or put option (the purchase of a call option itself is also subject to the tender offer rules but the sale of a put option is not). Though the FSA has stated that the tender rules "generally" apply in such situations, it has not clarified the circumstances in which they do not apply.

Indirect holdings of relevant securities

The tender offer rules will apply to the purchase of relevant securities in a company (even if not listed) which holds relevant securities in the target company, when both:

By taking into account the substance of the intermediate holding company and factors relating to substantial control, the purchase of the relevant securities is substantially the same as a purchase of relevant securities in the target company.
Other existing shareholders in the target company have not been provided with an opportunity to sell the relevant securities.

Redemption of partnership interests in kind

The making of distributions in kind of relevant securities that constitute partnership assets on dissolution of the partnership is not subject to the tender offer rules as long as the decision to distribute the relevant securities is not taken by the partner who receives them, but by the managing partner.

However, such a distribution will be subject to the tender offer rules where either:

The partner who accepts the distribution does so voluntarily (for example, after negotiation with the managing partner).
The partnership agreement originally provided that the partnership may acquire the relevant securities and distribute them to each partner.

The same treatment applies to the redemption of relevant securities in kind when a company dissolves.

Taking security interests in relevant securities

Granting of security interests. Taking security interests in relevant securities is generally not subject to the tender offer rules; provided that both:

In the case of an assignment for security, the assignee is in substance merely the holder of a security interest and not an ownership interest (for example, in the applicable book-entry system the assignee is described as a "special shareholder" on the assignment).
The granting of the security interest is not made to circumvent the tender offer rules.

Enforcement of (already granted) security interests. Enforcement of security interests by way of effecting:

Transfer of the ownership from the grantor to the security interest holder is not subject to the tender offer rules.
A sale of the ownership from the security interest grantor to a third party is subject to the rules.

Financial instruments

Japan moves to centralise clearing of OTC derivatives

A bill to amend the Financial Instrument and Exchange Act (FIEA) was submitted to the Japanese Parliament on 9 March 2010. The bill covers a wide range of amendments, but one of the most interesting amendments contained in the bill concerns imposing an obligation on securities companies and banks to clear over-the-counter (OTC) derivatives through a central counterparty.

The bill sets out two kinds of rules on centralising clearing of OTC derivatives depending on the type of products:

Securities companies and banks are required to clear certain OTC derivatives through either a domestic clearing institution, a domestic clearing institution acting in co-ordination with a foreign clearing institution, or a foreign clearing institution permitted by Japanese authority.
While not specified, it is anticipated that the type of OTC derivatives to be covered will be plain-vanilla interest rate swaps (denominated in Japanese yen). Further details will be set out in Cabinet Office regulations. This amendment aims to reduce a settlement risk by decreasing the amounts of obligations owed by one securities company to another.
Securities companies and banks are obliged to make a domestic clearing institution a central clearance system in respect of credit default swaps (CDS) with the iTraxx Japan index as the underlying. Again, further details will be set out in Cabinet Office regulations.
The central counterparty (CCP) will not only be responsible for settlement of trades but also for making determinations as to whether a credit event has occurred. Of course, the terms of the transactions through the CCP will need to contain terms that permit this to occur.
The Japanese FSA has not indicated that regulation will extend to single name CDS. These will not be included within in the scope of this regulation due to the greater impact of a credit event on such a CDS. This amendment was made to reflect the perception that a domestic clearing institution is an appropriate entity to make determinations as to whether a credit event has occurred in respect of Japanese entities.

At present, there are no guidelines regarding how a clearing institution will make determinations with respect to credit events under CDS. In this regard, the Tokyo Financial Exchange and the Japan Securities Clearing Corporation have indicated in their reports that they will follow the determinations made by the relevant bodies established by the International Swaps & Derivatives Association, Inc. (ISDA) to determine the occurrence of credit events.

Centralised clearing of OTC derivatives has been discussed internationally after the financial crisis and several clearing institutions in Europe and the US have already been operating clearing businesses in respect of OTC derivatives. It is likely Japan will follow models used overseas as foreign clearing institutions are advanced in terms of the systems they have in place for the centralised clearance of OTC derivatives.

For securities companies and banks, centralisation of the clearing process will have advantages in terms of capital requirements. However, in terms of how securities companies and banks prepare for the setting up a system of centralised clearing it is important that the clearing system follows a format similar to that used in other countries (as securities companies and banks already use centralised clearing in other countries). Consequently, it is equally important for a Japanese clearing institution to set out a system and framework, taking into account current infrastructure in securities companies and banks.

Structured finance and securitisation

The FY2010 Tax Reform's effects on the regulations concerning the real estate securitisation business

On 1 April 2010, a set of revised tax laws concerning FY 2010 Tax Reform, including some amendments and additions to the Act on Special Measures Concerning Taxation (Act No. 26 of 1957), came into effect.

Three new Special Taxation Measures (STMs) relevant to foreign investors in real property securitisations in Japan are of particular interest. With regard to the STMs themselves, a new Law for Improving Transparency of Special Taxation Measures came into effect at the same time.

Further, it has recently been reported that the abolition or reduction of STMs is being discussed by the government's Tax Commission with a view to reducing the burden of Japanese corporate tax.

Outline of FY 2010 Tax Reform regarding real estate securitisation

Abolition of one of the pass-through requirements for TMK. TMKs (Tokutei Mokuteki Kaisya）established under the Act on the Securitisation of Assets (Act No.105 of 1998) are a type of special purpose vehicle used for securitisation transactions in Japan.

The 2010 Tax Reform has abolished one of the requirements for transparency in TMKs for tax purposes.

Before the FY 2010 Tax Reforms, a TMK was required to state in asset liquidation plans that 50% or more of the principal amount of bonds issued by it would be offered in Japan.

Exclusion from taxation of book-entry transfer bonds issued by TMKs. This exclusion system is newly established. In particular, individual income tax or corporation tax will not be imposed for any interest or profit from redemption to be received by a foreign resident or a foreign corporation meeting certain requirements with regard to book-entry transfer bonds issued by Japanese issuers on or before 31 March 2013.

Additionally, this:

Will not apply to any interest or profit from redemption to be received by any specially-related non-resident or corporation which has a special relationship with the issuer of such bonds.
Will apply to interest calculation periods starting on or after 1 June 2010.

The above applies to bonds issued by TMKs and J-REITs as well.

The tax reforms described under the above subheadings are expected to encourage foreign investment in the Japanese real estate markets.

Amendment to registration licence tax applied to TMK’s acquisition. Currently registration and licence tax are possible at a reduced tax rate (0.8% of acquisition cost, originally 2%) with respect to a registration of transfer of the ownership where TMKs or J-REITs acquire real property. The 2010 tax reforms have excluded warehouses and their premises from the application of these reduced taxes (normal tax rates apply).

In addition, the 2010 tax reforms have amended such reduced tax rate as below:

From 1 April 2010 to 31 March 2011: 0.8%.
From 1 April 2011 to 31 March 2012: 1.1%.
From 1 April 2012 to 31 March 2013: 1.3%.

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