MK @ Legal Biz Leaf Directors’ obligation of an explanation
If the amount to be paid in for the shares is particularly favorable to subscribers, directors are required to explain its appropriateness at the shareholders’ meeting.
For example, if common shares, previously issued at 1,000 yen per share, is issued to a third party for 500 yen per share at the next stage of the issuance, it would dilute the value of the shares and so could seriously impede the rights of existing shareholders.
Therefore, the Directors need to explain at the shareholders meeting about matter such as:
(i) the reasons why the shares must be issued on particularly favorable terms (e.g., the current management crisis, the need to raise funds, etc.)
(ii) the method for the calculation of such shares values,
(iii) the basis for determining that the number of shares to be issued and the degree of dilution to shareholders’ interests are reasonable.
However, it is very difficult to determine whether or not a share of private company is a favorable issuance or not, because the calculation method of share price is complicated and not uniform. In this regard, the Supreme Court stated that “it is reasonable to conclude that, in the absence of special circumstances, the issue price does not constitute a ‘particularly favorable issue price’ if it can be said that the issue price was determined by a reasonable calculation method based on objective data.
Based on this precedent, it can be said that there are fewer situations in which Directors are obliged to provide explanations regarding the favorable issuance. On the other hand, it is important to continuously build a good relationship with existing shareholders, and in order to avoid future conflicts, it is advisable to explain the basis of calculation, etc. at the shareholders meeting, even if there is no special obligation to be arose.
The subscription requirements must be equally stipulated.
It is stipulated that the subscription requirements must be uniformed for each offering.
For example, if the paid in capital is set at 100 yen per share for A and 200 yen per share for B, these two subscription items cannot be resolved as the same item; it is necessary to separate the agenda items (e.g., Proposal 1: Issuance of shares to be offered Proposal 2: Issuance of subscription items) and pass the resolution as decisions on separate subscription items.
Resolution of Delegation to Directors or the Board of Directors
For example, when it is expected that a company will receive investments from third parties multiple times a year, it is very time-consuming to hold several general shareholders’ meetings to decide on subscription requirements and to pass resolutions.
In order to avoid such situation, shareholders are allowed to leave other details to the resolution of the Directors or the Board of Directors, provided that the following matters are stipulated by a special resolution of the general shareholders’ meeting (so called “delegated resolution”).
Matters to be stipulated in the resolution of delegation
– Maximum number of shares to be offered: e.g.,100,000 shares
– Minimum amount to be paid in e.g.: 10,000 yen or more per share
*If the minimum amount to be paid in is an amount that is particularly favorable to the subscribers, the Directors are obliged to explain the reasonableness of such offering matters at the relevant general meeting of shareholders.
If the above resolution is passed, the Board of Directors/Directors may, by its own decision, pass a resolution concerning the issuance of shares for subscription any number of times per year until the above number of issuance limit is reached, provided that the amount to be paid in is at least 10,000 yen per share. However, the mandate of the general meeting of shareholders shall be effective until the “payment date” or “last day of the payment period” arrives within one year from the date of the resolution of such mandate.
For Example:
A resolution of delegation to the Board of Directors is passed on June 1, 2022
・If the Board of Directors determines June 1, 2022 as the due date of the payment of the capital →OK
・If the payment date is set as June 2, 2022 by the Board of Directors →NG
MK@ 06/23/2022
