Dividends of Surplus

A Kabushiki-Kaisha may distribute dividends of surplus (*) to its own shareholders (excluding the company itself) any times during the term. On the other hand, if unlimited dividends are allowed, the company’s assets will decrease and the interests of the company’s creditors may be harmed. Therefore, various restrictions are imposed on the distribution of surplus.

* The term “surplus” is defined in Article 446 of the Companies Act. Please consult with your tax accountant in advance about the specific amount.

A Method of Calculating the Amount of Surplus

1. “Other capital surplus” + “Other retained earnings” as of the last day of the most recent fiscal year.
2. Add the following items that occurred after the most recent fiscal year to 1 above
　・In cases where treasury shares are disposed, the amount of marginal gain (Subtract if there were marginal losses)
　・Amount transferred from capital and capital reserves to retained earnings
3. Subtract the following items that occurred after the most recent fiscal year from 2 above
　・In cases where treasury shares are canceled, the amount of the book value of such shares
　・In case of distribution of surplus, the book value of the total amount of the dividend property
　・Each item stipulated in Article 150 of the Corporate Calculation Regulations

NOTE: As you can see from the above, it is “surplus” that can be the source of dividends, in other words, “capital” and “capital reserves” cannot be directly distributed to shareholders.
However, the capital or capital reserve can be transferred to surplus by proceeding the “reduction of capital” and/or the “reduction of capital reserve” procedures.

The Distributable Amount

The total book value of money, etc. to be delivered to shareholders cannot exceed the “distributable amount” as of the effective date.
* Please consult with your tax accountant in advance about the specific amount.

A Method of Calculating Distributable Amount

A. The “amount of surplus” above
B. Add to A above the profit for the period determined as a result of the preparation of temporary financial statements (= Balance sheet and Profit and loss statement prepared on a specific date during the period as an extraordinary closing date)
C. Subtract the following from B above
　・The loss determined as a result of the preparation of the temporary financial statements
　・Book value of treasury stock
　・In cases where Treasury Shares are disposed of after the last day of the Most Recent Business Year, the amount of the value received in exchange for such Treasury Shares
　・Each item stipulated in Article 158 of the Corporate Calculation Regulations

NOTE: The amount that can be distributed as surplus is up to the distributable amount calculated as above.

Three million yen of Net Assets

Even if a company has surplus and meets the requirements for distributable amount, it cannot be distributed if the amount of their net assets is less than 3 million yen.

Obligation to Accumulate Reserves

After distribution of surplus, a certain amount shall be recorded as additional capital reserves or retained earnings reserves in accordance with the following conditions.
*Except in the case of a company split in which shares are delivered as a dividend from surplus (= Split-Off).

1. 1/10 of the dividend
2. (1/4 of stated capital) – (capital + capital reserve)
The smaller of a. or b. above shall be accumulated up to 1/4 of the amount of capital

For Example:
・The amount of distributing surplus: 3 million yen
・The amount of capital: 100 million yen
　100 million yen x 1/4 = Obligation to accumulate up to 25 million yen

(A) Capital reserve (0 yen) + Retained earnings reserves (20 million yen) = Total 20 million yen
　 a. Surplus (3 million yen) x 1/10 = 300 thousand yen
　 b. 25 million yen – (0 yen + 20 million yen) = 5 million yen
　 300 thousand yen shall be recorded as additional capital reserves or retained earnings reserves.

(B) Capital reserve (5 million yen) + Retained earnings reserves (20 million yen)
　　= Total 25 million yen ＝ There is no need to accumulate additional reserve

Note: A larger amount of surplus than expected may be required for the distribution of surplus.

Resolution of the General Meeting of Shareholders

In order to distribute the amount of surplus, it is necessary to obtain approval at a general meeting of shareholders. (In principle, ordinary resolution is required)
If the Articles of Incorporation stipulate that a dividend of surplus shall be distributed to shareholders as of the end of the fiscal year, a resolution regarding the dividend of surplus shall be passed within three months of the record date.
Therefore, the resolution is usually passed at the annual shareholders’ meeting.

Matters to be resolved

(1) The kind and total book value of the Dividend Property
Example: Money: Total amount of 100 million yen)

(2) The matters regarding the assignment of the Dividend Property to shareholders
Example: 100 yen per share of common stock of the Company

(3) The day on which such distribution of dividend of surplus takes effect.
Example: MM/ DD/ YYYY
The date of payment or the date of commencement of payment.
In most cases, it is the day following the resolution date (the next business day of financial institutions). Please note that the record date for the distributable amount is not the date of resolution, but the effective date.

In the case where two or more classes of shares are “issued”
(4) If there is any arrangement that no Dividend Property is assigned to the shareholders of a certain class of shares, a statement to such effect and such class of shares;
(5) If there is any arrangement that each class of shares shall be treated differently with respect to assignment of Dividend Property, a statement to such effect and the details of such different treatment.
Example: 1.5 times the amount of dividends on common stock, etc.

Note: Surplus must be allocated in proportion to the number of shares held by each shareholder. Even though each class of shares can be treated differently, shareholders within the same class must be treated equally.
Therefore, in order to distribute more or less surplus to only certain persons, it is necessary to pass a resolution to amend the Articles of Incorporation to provide for gentry class shares, etc.

The cases which a resolution can be passed by the Board of Directors

Dividends of surplus can be resolved by the Board of Directors if the following conditions are met.

Condition 1: When it is stipulated in the Articles of Incorporation, a dividend of surplus can be resolved at the Board of Directors meeting paid only once in the middle of a fiscal year (called “interim dividend”). However, in a such case, the dividend property is limited to “cash”.

Condition 2: If a company has an accounting auditors with either a Board of Company Auditors or with Committees, and if the term of office of directors is one year and all other conditions are met, surplus can be distributed any number of times during the fiscal year by a resolution of the Board of Directors as provided in the Articles of Incorporation.

Delivery of Dividend Property

The law stipulates that dividend property shall be delivered to shareholders at their addresses recorded in the shareholders’ register or at the address notified by them. However, in practice, the payment is made to the account designated by the shareholder. In principle, the company bears the handling charge for this procedure.

MK@ 07/02/2022