Record Date: Why is it necessary?

The necessity of Record Date

Action Seeking Revocation of a Resolution at a Shareholders Meeting

If there was a violation of the law regarding the convocation procedure, a company may be sued for “Revocation of a Resolution at a Shareholders Meeting”, and in the worst case, the resolution itself may be rescinded. In such cases, the company needs to spend so much time, money, and effort on their accountability, which still significantly would damage their credibility with shareholders.

To avoid such mistakes, the company must send a notice of convocation to the shareholders (excluding those who are not entitled to vote at the meeting) listed in the shareholders’ registry and have them exercise their rights at the meeting. However, at what point in time of the shareholder registry shall be used as basis to determine the address to which notices should be sent? Is it the shareholders registry as of the date the notices were sent? Or on the date of the meeting was held? 【 Skip to the conclusion 】

Shareholders as of the date of the general meeting of shareholders

If the company has not set a “record date,” as described below, the shareholders on the shareholders’ registry on the day of the meeting are the shareholders entitled to exercise voting rights at the meeting.

The problem here is that the company cannot 100% predict who the shareholders would be as of the date of the meeting at the time it dispatch the convocation notice.

For example, in general in a private company with a board of directors is required to issue a convocation notice to its shareholders at least one week prior to the date of the shareholders’ meeting (Article 299, Paragraph 1 of the Companies Act). However, if a share transfer and update of the shareholders registry takes place during this one-week period, the transferor will no long entitled to exercise his/her rights at the shareholders’ meeting, while the transferee will be. Meaning in this case, it turned out to be as the company has sent the convocation notice to the transferee by mistake.

The Companies Act, however,  stipulates the provision of a “Record Date” to avoid such situation.

Shareholders as of the record date

“A Stock Company may, by prescribing a certain date (hereinafter in this Chapter referred to as a “Record Date”), prescribe the shareholders who are stated or recorded in the shareholder registry on the Record Date (hereinafter in this article referred to as “Shareholders as of the Record Date”) as the persons who may exercise their rights.”
ー日本法令外国語訳データベースシステムー

As it is stipulated as above, by setting a specific date as the “record date”, a company may fix in advance the shareholders who are entitled to exercise their rights at a general shareholders meeting.

Please note that if such a record date is prescribed, the company must give more than two weeks prior public notice of 1. Record date and 2. content of the rights which the shareholders on the date may exercise,  through public notice; unless there information are provided in the Articles of Incorporation in advance.
The reason public notice is necessary is to notify shareholders in advance of the record date and encourage them to take the shareholder registry update procedures.

Record Date for the Ordinary General Meeting of Shareholders

Many companies have a record date for the ordinary general meeting of shareholders stipulated in advance in their Articles of Incorporation. If you look at your company’s Articles of Incorporation, you may find the following clauses.

By stating the above article in the Articles of Incorporation, the prior public notice procedure is no longer required  (Article 124, Paragraph 3, proviso).

Note: The rights exercisable by shareholders as of the record date are limited to those exercisable within 3 months of the record date. Therefore, even if the articles of incorporation stipulate the last day of the fiscal year as the record date, if the ordinary general meeting of shareholders is held after the three-month period, it is necessary to conduct public notice procedures again and stipulate the record date.

Is public notice required for every extraordinary meeting of shareholders?

It is not so easy for companies to give prior public notice of the record date at every extraordinary shareholders’ meeting. If the method of public notice is “through the official gazette (kanpo)”, it would take several weeks to make an appointment for publication, and cost several ten thousand JPY per such notification. 
Thus in practice, there are solutions that are generally taken as follows

1: Do not set a record date.
Prescribing a record date is not mandatory. If there is no change in the registry of shareholders due to share transfers, share subscription, etc., it is sufficient to allow shareholders as of the date of the shareholders’ meeting to exercise their rights as they are.

2: Take prompt action, if there is a unexpected change in the composition of shareholders.
If an unexpected change in shareholders occurs after the notice of convocation has been sent, the notice of convocation should be sent to the new shareholders as soon as possible. By letting all shareholders who are entitled to exercise their votes to attend the meeting, the defect in the notice of convocation may be cured. (However, it is recommended to receive a consent from the shareholders as for the unavoidable shortening of the convocation notice period)

A new shareholder after the record date asked the Company to allow him to exercise his rights.

What if  a company has offered to concluded a general underwriting agreement by an investor with a condition of “participation in the resolution for the election of directors at the next general meeting of shareholders” right after the record date?

For about such a case, the Companies Act allows the company to let new shareholders after the record date to exercise their rights (Article 124, Paragraph 4 of the Companies Act). On the other hand, this exception is not allowed in cases where the rights of the original shareholders as of the record date would be prejudiced.

Conclusion

• If a company sends out a notice of meeting to the wrong shareholder, depriving that shareholder of the opportunity to exercise his or her voting rights, there is a risk that the resolution will be rescinded.
• On the other hand, there may be a certain time lag between the date of dispatch of the convocation notice and the date of the general shareholders’ meeting, in which case the company cannot predict changes in the composition of shareholders.
• To prepare for such a contingency, a company may set a record date. (Unless it is stipulated in Articles of Incorporation, more than two weeks prior public notice to the record date is required.)
• If no record date is prescribed, then the shareholders on the day of the meeting are those who are entitled to exercise their rights.
• The company may allow shareholders to exercise their rights after the record date to the extent that it does not prejudice the rights of other shareholders.

As described above, a company has to prepare for general meeting of shareholders with great care, since making mistakes in convocation procedures may cause shareholders to lose their confidence in the company.
In particular, if there are plans to transfer shares or issue shares for subscription, etc. in rapid succession, it is always a good idea to organize at which point in time of shareholders have rights to exercise their votes to the meetings, and to keep a  shareholders registry accordingly. Also, considering about some unexpected events might happen sometimes, it is recommended to prepare for shareholder meetings as early convenience.

MK@ 04/06/2022