Acquisition of treasury shares by agreement with Specific Shareholders

Repurchase of treasury shares by agreement with Specific Shareholders

“One of our Directors is going to resign the company, so please tell us the process of returning the invested money.”

I sometimes receive such enquiries from my clients, especially from those who manage their companies among friends or relatives. The elaborated meaning of this enquiries is that the company would like to purchase back his/her shares at the original price (the same amount as the amount invested by the Director), since the person decided to resign as a Director.

Before answering the question, I always explain as basic premise that the company is not always obliged to return the funded money to their investors.

This is because the “loaning” and “investment” are conceptually different. When a company receives a loan from a bank or other financial institution, then they are obligated to repay the loan, in principle. On the other hand, if a company receives an equity investment from the investors, they can use the money without guaranteeing the principal to the investors, since those investors can recover its capital either by selling its shares or by being paid the dividends from the company’s retained earnings. Therefore, it is important to remember that if a shareholder asks the company to return his or her investment, the company does not have to comply with their demands.

However, it may be difficult to reject the resigning directors’ (and investors) demands, even more so if the person is a close friend or relative.
Therefore, this article will explain how to repurchase shares for value from certain shareholders.【 Skip to the conclusion 】

The principle of equality of shareholders

When a company purchases back shares from a specific shareholders, the process cannot be completed with just a “share transfer agreement” between the company and the shareholders. This is because using the company’s funds to cash out the shares of a particular shareholder may be unfair to other shareholders. To prevent such unfairness, the Companies Act strictly regulates the procedures for acquiring shares from shareholders for a value.

Restriction on  distribution of profits: Distributable Amount

It is inevitable for the company to drain the its’ assets when they are purchasing back their shares from shareholders and if such an act is repeated within the company, it may cause unforeseen damage to the company’s creditors. Therefore, the Companies Act stipulate certain restrictions when the company distribute their financial resources.
*These regulations also apply to situations where a company distributes the dividend.

(Restrictions on dividends, etc.)
“Article 461  (1) The total book value of the Monies, Etc. (excluding shares of the relevant Stock Company. The same shall apply hereinafter in this Section) delivered to shareholders as a result of the following acts may not exceed the Distributable Amount as at the day on which such act takes effect:
(i) ….
(ii) The acquisition of shares of such Stock Company based on a decision pursuant to the provisions of Article 156(1) (limited to acquisitions of shares by such Stock Company in the cases provided for in Article 163 or Article 165(1));”
日本法令外国語訳データベースシステム

Summary: The maximum purchase amount must be within the Distributable Amount

Method of calculation of Distributable Amount

The following is method of brief calculation of the distributable amount.
(It is highly recommended to ask your tax accountant for more certain calculation)

Basic Formula:
(A) Other capital surplus + Other retained earnings (as of the end of fiscal year)

Adjustment Formula:
(B) Above (A) + Changes (adding/ subtracting) in other capital surplus and other retained earnings after the end of fiscal year until the effective date.
(C) Above (B) – changes (adding/ subtracting ) in book value of treasury shares after the end of fiscal year until the effective date – price of disposal of treasury shares during the current term.

＝Distributable Amount
* One method of increasing the amount of “Distributable Amount” is to reduce the capital or capital reserves and transfer the amount to the other capital surplus.

Procedures to Repurchase of Treasury Shares

*In practice, negotiations with the specific shareholders and other shareholders are conducted in advance.

1. Resolution to convene a general shareholders’ meeting at:

Companies with Board of Directors (BoD): the Board of Directors’ meeting
Companies without BoD: Determination by the Directors

2. Sending the notice of convocation of the shareholders’ meeting and the notice of Tag Along Rights

*Tag Along Rights = The rights that other shareholders may also claim the company to purchase their shares.

Deadline:
On the company’s end : The Notice must be given at least one week prior to the general shareholders’ meeting of below 3.
On the shareholders’ end: The claim must be made at least 3 days prior to the general shareholders’ meeting of below 3.

《Demerit of giving shareholders a Tag Along Rights》
The company must purchase shares from unanticipated shareholders and as a result, there is a possibility that they will be regulated the distribution of the resources or that the purchase from the shareholders they wanted to acquire in the first place will not go as planned.
To prevent such cases, it is possible to stipulate in the Articles of Incorporation that the Tag Along Right is not permitted at the time of repurchasing the shares from specific shareholders. (Note: The consent of all shareholders is required to stipulate this provision after the establishment of the company.)

3. Resolution of a general meeting of shareholders

The following matters shall be resolved at the shareholders meeting with special resolution.
*The said specific shareholder cannot participate in this resolution; unless the he/she is the only shareholders who can exercise their voting rights in the meeting.

Companies Act, Articles 145, Paragraph 1
a. The number of shares to be acquired
b. The description and total amount of the Monies, etc. that will be delivered in exchange for the acquisition of the shares
c. The period during which the shares can be acquired. (shall not exceed one year)
d. The fact that the notice under Article 158, Paragraph 1 of the Companies Act (below 4) shall be given only to specific shareholders

4. Resolutions of the details of the purchasing amount, etc.

The following matters shall be resolved at:
Companies with BoD: BoD’s meeting
Companies without BoD: shareholders meeting
(*In practice, these matters are stipulated together in advance in above 1 meeting for the company with a BoD, and in above 3 meeting for the company without a BoD).

Companies Act, Article 157 , Paragraph 1
a. The number of shares to be acquired　
b. The description, and the number or amount, or the method for the calculation thereof, of the Monies, etc. that will be delivered in exchange for the acquisition of one share
c. The total amount of Monies, etc. that will be delivered in exchange for the acquisition of the shares
d. The date on which the offer to transfer the shares will be made

5. Notification the matter determined in above 4 to the specific shareholder

6. Application from the specified shareholder

The shareholder who has received the notice shall apply to the company by notifying the number of shares which they want to be purchased.

Effective Date: The deadline of the application date
On the date, the shares are deemed to have been transferred to the company, and a resolution approving the transfer is not required.

If the total number of shares applied for exceeds the total number of shares to be acquired as determined in above 4, the number of shares will be allocated in the following manner. 

7. Rewriting of shareholders’ register on the effective date

Free Acquisition of treasury shares by agreement with Specific Shareholders

With the agreement of shareholders, a company may obtain treasury shares from shareholders without any charges. In this case, the number of shares to be repurchased, the effective date, etc. can be determined by a resolution of the BoD or by the Directors, and there is no need to hold a general meeting of shareholders nor to notify others shareholders for tag along rights.

Also, as there is no risk of asset outflow of the company, there is also no application of financial resource regulations.

Conclusion

• There are several regulation stipulated in the Companies Act for the repurchase of shares from shareholders.
  i) All existing shareholders must be given the opportunity to sell their shares.
  ii)  The company can only repurchase shares within the Distributable Amount
  iii) A resolution must be passed at a general shareholders meeting, etc.
• The above regulations do not apply for the acquisition of shares from shareholders without payment.

MK@ 06/05/2022