Is it necessary to issue the share certificates?

Is it necessary to issue the share certificates?

As it was amended in 2004, the Japanese Companies Act states that in principle, it is not mandatory for Kabushiki-Kaisha to issue share certificates. Therefore, there is no problem of stating in the articles of incorporation that share certificates are not to be issued (even if nothing is written, the company will automatically become a company that does not issue share certificates).

Anyhow, it is possible that you may be (either in business or personally) transferred shares of a Japanese company issuing share certificates in the future, so it is important to at least be aware of the differences between the two systems.

Note: The description below only cover the systems of public and private companies. Please note that the systems of listed companies are differ from those two.  

Share certificate-issuing company vs. Non-share certificate issuing company

Difference in effective date when new shares are issued

The effective date when new shares are issued differs between a share certificate-issuing companies and non-share certificate issuing companies:
Example:  Mr. A subscribes for 100 shares from a Peach KK.

Share-certificate-issuing companies
The effective date is either:
(i) Due date of a capital payment
(ii) Date of a capital payment within the determined payment period

Example:
(i) Date when Mr. A pay money to Peach KK
(ii) Date when Mr. A pay money within the payment period

Non-share-certificate-issuing companies
The effective time is when the payment of the capital contribution is made and when the share certificate is issued by the company.

Example: When Mr. A pay money and receive share certificate from Peach KK
Thus, for example, if a share certificate does not reach Mr. A due to it was lost or stolen while being mailed, the issuance of share will not be effective.

Differences in share transfer methods

The method of transferring shares differs between share-certificate and non-share-certificate-issuing companies
Example: Transferor Mr. A transfers shares to Transferee Mr. B.

Requirement process for the effectiveness:

Share-certificate-issuing companies:
The transfer is completed only by a declaration of intent by the transferor and transferee. In other words, the transfer of shares is completed only when Mr. A expresses his intention to sell the shares to Mr. B, and Mr. B expresses his intention to buy the shares from Mr. A. Of course, it is advised to have a written agreement in order to manage the risks for both parties.

Non-share-certificate-issuing companies
In addition to the declaration of intent by the transferor and transferee, physical delivery of the share certificates is required. Meaning, if Mr. A does not actually deliver the share certificate to Mr. B, the transfer will not take effect. Thus, it is recommended to transfer share certificates and receive money at the same time.

For your information: There was a case in which a transfer of shares was still deemed effective. The reason for this was that the company did not issue his certificate even after he strongly requested it.

Requirements for perfection:

Share-certificate-issuing companies：
If share certificates have been issued, the certificate itself can be used as evidence by the company. Therefore, Mr. B can make a request to the company to rewrite the shareholder registry by presenting the share certificate, without Mr. A getting involved.

Conversely, Mr. B needs to show the actual share certificate to a third party to prove himself as a shareholder and the updated registry cannot be used. (Article 130, Paragraph 2 of the Companies Act).

Non-share-certificate-issuing companies：
Without physical evidence in the form of a stock certificate, how can transferee Mr. B, prove to the company or a third party that he is the true current shareholder?

In principle, the transferee Mr. B “and” the transferor Mr. A could jointly file a request to the company for an update to the shareholder registry. By having all the parties involved in the request, it can prevent an unauthorized person from rewriting the registry without permission. Once the rewriting of the shareholders registry is completed, Mr. B will be able to use this registry as a certificate to prove that he is a shareholder.

Reason for the amendment of the principle in regards to the non-issuance of share certificates

The reasons for the amendment of the principle of the law from “issuance of share certificates” to “non-issuance” were as follows:

1.  Risk of loss and theft　
In a share certificate-issuing company, the person in possession of the share certificate is presumed to be the legitimate shareholder. In other words, if a share certificate is lost, the risk of losing rights as a shareholder increases. (Article 131, Paragraph 1 of the Companies Act)

For example, if Mr. B accidentally picks up a stock certificate lost by Mr. A and sells it to Mr. C. If Mr. C was unaware of that fact or was without negligence, Mr. A may lose his position as a shareholder.

2. Low tradability of shares in privately held companies
In Japan, approximately 80-90% of Kabushiki-Kaisha have being  privately held in small to medium-sized companies. Therefore, share transfers themselves would not be frequently executed. Hence, it was either people kept issued share certificates in a safe or the company had not issued them in the first place.

*This situation was a violation of the Companies Act, since it is stipulated that a company must issue share certificates without delay after the issuance of shares. However, the laws were amended as share certificate issuing companies of the private companies are not required to issue share certificates until requested to do so.

3. To reduce costs:
Especially in large and publicly traded companies, printing and labor costs for printing stock certificates were relatively expensive.

Conclusion

Today, most companies in Japan has no longer issue stock certificates. While the law amendment has led to cost savings for the company and has reduced the risks associated with the loss of share certificates, it has also made it more difficult to identify genuine shareholders of the company due to the loss of physical evidence in the form of “share certificates”.

“We don’t know who our shareholders are!”

There are many cases for non-Japanese shareholders to have neglected to complete the application for changes of shareholder registry procedures after the transfer of shares.
In such cases, the company is legally exempted from liability if it treats the shareholders listed in the shareholders’ registry as its own shareholders.
Which means, that there is a high possibility that dividends, for example, will be distributed to the former shareholders listed in the current shareholders’ registry.

Contrary, there are may cases which a company neglects to prepare and update the shareholders’ registry. In such cases, it would fail to send the convening notice of the meeting to the legitimate shareholders, which may lead to the meeting to be invalid.
The preparation of a shareholders’ list is an obligation stipulated in the Companies Act (Article 121 of the Companies Act). Therefore, even if the number of shareholders is small, it is highly recommended to prepare the shareholders registry from the establishment stage.

MK@ 03/27/2022