MK @ Legal Biz Leaf Features of Share Option
The first step in issuing Share Option is to determine the features of the Share Option and the required matters are as follows (Companies Act, Article 236).
Necessary matters to be stated
i. The number of the shares underlying the Share Options (or, for a Company with Class Shares, the classes of the shares and the number of shares for each class), or the method for calculating that number;
For Example:
If stating a specific number:
10 common shares (1 share of common share per unit of Share Options)
* “The number of the shares underlying the Share Options” refers to the total number of shares (10 shares), not the number of shares per unit of Share Options.
If stating a specific calculation method:
(i) The class of shares to be issued upon exercise of the Share Options shall be common shares.
(ii) The number of shares to be issued or to be distributed upon exercise of the Share Options shall be the number obtained by dividing the total issue price of the Share Options by the “Conversion Price”.
The “Conversion Price” means the lower amount of following:…..
ii. The value of the property to be contributed when such Share Options are exercised or the method for calculating that value;
Although Share Options can be issued with no charge, it is necessary to make a capital contribution when actually exercising the rights to acquire shares.
For Example: 100 yen per unit of Share Option in cash (it may be stipulated as XXX yen per share).
iii. The period during which such Share Options can be exercised;
The period during which the Share Options may be exercised is specified. A Share Option that will not be exercised within the period will be extinguished.
For Example: From (Date) to (Date).
iv. Matters regarding the capital and capital reserves that will be increased in cases where shares will be issued as a result of the exercise of such Share Options;
When Share Options are exercised, the amount to be recorded as capital and as capital reserve out of the amount in (ii) above shall be determined in advance.
The amount to be credited to capital reserve is limited to 1/2 of the exercise price paid.
Optional matters to be stated
v. If property other than monies will be the subject of the contribution when Share Options are exercised, a statement to such effect and the description and value of that property
When exercising Share Options, it is possible to contribute not only money but also in kind (e.g., claims, shares of other companies, etc.). In such cases, the content and value of the property to be contributed shall be specified in advance.
In most of the cases, companies issue convertible bonds with Share Options are issued by contributing such bonds in kind.
vi. If it is arranged that the approval of such Kabushiki-Kaisha will be required for the acquisition of such Share Options by assignment, a statement to such effect;
In principle, Share Options are freely transferable, even in the case of a private company (where all shares are subject to restrictions on transfer). On the other hand, since the acquirer of the Share Options is a potential future shareholder, in practice, restrictions on the transfer of Share Options are almost always established to prevent unknown third parties from becoming the holders.
vii. If it is arranged that such Kabushiki-Kaisha may acquire such Share Options on condition of certain grounds arising, the following matters:
* Share Options with such conditions are called as “Share Options with acquisition clause”.
(a) to (c) below stipulates the grounds of which the share options may be acquired.
(a) A statement that such Kabushiki-Kaisha may acquire its Share Options on the day when certain grounds arise, and of those grounds; (b) If it is arranged that the grounds referred to in (a) above will arise as at the arrival of a day to be separately prescribed by such Kabushiki-Kaisha, a statement of such arrangement;
(c) If it is arranged that a portion of the Share Options referred to in (a) above may be acquired on the day the grounds referred to in (a) above arise, a statement of such arrangement and of the method for determining the portion of the Share Options to be acquired;
For Example:
If the Company shall acquire all or part of the Share Options on a date separately determined by a resolution of the Board of Directors upon the occurrence of any of the following events of acquisition, the Company shall determine the Share Options to be acquired by a resolution of the Board of Directors in the event of partial acquisition.
1) In the event that the holder of the Share Options loses his/her position as a director of the Company.
2) ….
(d) to (h) below stipulates the consideration for acquisition of the Corporation in exchange for the acquisition of Share Options:
If (d) ~ (h) below in such Kabushiki-Kaisha are delivered to the holders of such Share Options in exchange for the acquisition of the Share Options referred to in (a);
- (d) If Shares: stipulates “the number of such shares (or, for a Company with Class Shares, the classes of the shares and the number of shares for each class), or the method for calculating that number”
＊In practice, in order to avoid fractions of shares to be delivered, it is almost always stated “any fraction of a share that is less than one share shall be rounded down to the nearest whole share”.For example, if, as a result of the method of calculation of the shares to be issued upon acquisition of such Share Options, 1.4 shares of common share are to be issued for each, the fractional number of shares shall be sold at auction or with court approval in accordance with Article 234 of the Companies Act.
In order to avoid such a situation, such a clause is included in most cases in practice. In other words, in the case of 1.4 shares of common share, the shares to be delivered will be 1 share with fractions rounded down.
- (e) If Bonds (except for bonds with Share Options to shares): stipulates “the description of the classes of such Bonds and the total amount for each class of Bonds, or the method for calculating that total amount”
- (f) If other Share Options (other than those attached to Bonds with Share Option): stipulates “the feature and number of such other Share Options, or the method for calculating that number”
- (g) If Bonds with Share Option: stipulates “the matters prescribed in (e) for such Bonds with Share Option, and the matters prescribed in (f) for the Share Options attached to such Bonds with Share Option”
- (h) If property other than Share Options, etc.: stipulates “a description of the features and number or amount of such property, or the method for calculating that number or amount.”
It is also possible to acquire the Share Option without setting the acquisition consideration and without compensation.
In practice, in most cases where free Stock Options are granted to employees, etc., it is stipulated that the company may acquire the Stock Options for no consideration on the condition that the employee resigns from the company.
(This is because it would be difficult to manage the Stock Options if the employee leaves the company without returning their Stock Options).
viii. If it is arranged that in cases where such Kabushiki-Kaisha carries out acts listed in sub-items (a) to (e) inclusive below, the Share Options of the Kabushiki-Kaisha provided for in sub-items (a) to (e) inclusive is to be delivered to the holders of such Share Options, a statement to that effect and of the conditions of the same:
(a) Mergers (limited to cases where such Kabushiki-Kaisha is to be extinguished as a result of the merger): The Kabushiki-Kaisha that survives the merger or the Kabushiki-Kaisha incorporated as a result of the merger;
(b) Absorption-type Company Split: The Kabushiki-Kaisha which succeeds, in whole or in part, to any rights and obligations that a Kabushiki-Kaisha effecting an Absorption-type Company Split holds in connection with its business;
(c) Incorporation-type Company Split: The Kabushiki-Kaisha incorporated as a result of the Incorporation-type Company Split;
(d) Share Exchange: The Kabushiki-Kaisha that acquires all of the Issued Shares of the Kabushiki-Kaisha effecting the Share Exchange;
(e) Share Transfer: The Kabushiki-Kaisha incorporated as a result of the Share Transfer;
Share Options are extinguished when a company merges with another company, meaning that the holders of those Share Options are unilaterally deprived of their rights at the convenience of the company. In order to prepare for such a situation, it is necessary to roughly stipulate in advance what kind of Share Options will be granted by the surviving company to those holders.
For Example:
I) Number of Share Options to be delivered to the reorganized Share Option holders:
The same number of Share Options as the number of Share Options held by the holders shall be delivered.
II) Class of shares underlying the Share Options: Common share
III)……
ix. If, in cases where the number of the shares to be issued to the holder of Share Options who has exercised his/her Share Options includes a fraction of less than one share, such fraction shall be rounded off, a statement to that effect.
For example, if the company stipulates that two shares of common shares are to be delivered for every three Share Options unites, and if only one of the Share Options is exercised, the number of shares will be 1.5 shares, resulting in a fraction of 0.5 shares. In order to avoid such a situation, in practice, such a clause is almost always included.
If such a clause is not included, the company must deliver to the holders an amount equal to the market value or net asset value per share multiplied by the fractional shares, in accordance with Article 283 of the Companies Act.
x. If it is arranged to issue Share Option certificates representing such Share Options (excluding those attached to Bonds with Share Option), a statement to that effect.
The same as with shares, Share Options certificates can be issued. On the other hand, in practice, such certificates are rarely issued.
xi. In the cases provided for in the preceding item, if the holders of Share Options cannot make, in whole or in part, the demand under the provisions of Article 290, a statement to that effect.
If Share Options certificates are to be issued, the holder can freely choose whether to have the registered certificates or bearer certificate (the difference is whether the holder’s name, etc. is written on the certificates or not). If a company wishes to disallow this switching request, this clause can be included. However, it is rare for Share Option certificates to be issued in the first place.
MK @ 07/14/2022
