Converting Common Shares into Restricted Voting Right Class-Shares

When transferring shares to a third party, there is an option to have the existing shares converted into other class shares beforehand. For example, when someone negotiating to transfer his/her shares, but at the same time when transferee is not interested in management of the company, one possible solution is to convert your share into class shares without voting rights.

Example situation:
Shareholder A with 60 common shares, Shareholder B with 40 common shares
Share transfer approval authority: General meeting of shareholders

Shareholder B would like to transfer 40 shares to Shareholder C; whereas, Shareholders C would like to purchase those shares but does not have intention to manage the company as shareholders. In such situation 40 shares transferred can be converted from common shares into non-voting right class shares.
So, as a result after the share transfer:

Shareholder A with 60 common shares (with voting rights)
Shareholder C with 40 Class-A shares (without voting rights)

Procedures of converting issued shares

The following procedures are required to change the contents of the issued shares.
(i) Amendment of the Articles of Incorporation
　A resolution to amend the Articles of Incorporation to stipulate new Class-A shares is required at the general shareholders’ meeting.

(ii) Agreement on the change in the class of shares
　An agreement will be executed between shareholder B, who holds 40 shares of common stock, and the company regarding the change in the content of those 40 common shares.

(iii) Consent from shareholders who do not change their shares
　It would be unfair if some shareholders are forced to remain as common shareholders. Therefore, it is necessary to obtain written consent from the shareholders who will remain as common shareholders.

(iv) Application for registration
　When a new class of shares is established in the Articles of Incorporation, it is necessary to update the corporate registry.
(v) Share transfer from shareholder B to shareholder C
　In the case of a private company, it is necessary to pass a resolution to approve the transfer of shares at an approval authority stipulated in the Articles of Incorporation. If such authority is a “general meeting of shareholders,” the resolution can be passed in conjunction with meeting of (1) above. However, there is no guarantee that agreement or consent of (2) and (3) above will be obtained, so it is recommended that the resolution be passed on the condition that all requirements of share conversion are met.

Restricted Voting Rights Shares

In principle, all shareholders of Kabushiki-Kaisha have (i) the right to receive dividends from surplus, (ii) the right to receive distribution of residual assets, and (iii) the right to exercise voting rights the shareholders meeting. Of these, class shares with restriction of the voting rights are called ” Restricted Voting Rights Shares”.

Sample phrase of Restricted Voting Rights Shares to stipulate in the Articles of Incorporation:
The Articles of Incorporation of a Kabushiki-Kaisha with restricted voting rights shares are generally stipulate as follows.

Article X. Shareholders holding Class-A shares shall not exercise voting rights at the general meeting of shareholders.

If this provision is stated, shareholders holding Class-A shares cannot exercise their voting rights at the general meeting of shareholders. Therefore, unless otherwise provided for in the Articles of Incorporation, shareholders holding Class-A shares may not exercise their voting rights, for example, in resolutions for a change of trade name, election of directors, reduction of capital stock, dissolution, etc.

On the other hand, the Companies Act stipulates that certain resolutions may not take effect without a resolution of a general meeting of class shareholders in addition to a resolution of a general meeting of shareholders.

As a typical example, in the case of “issuance of class shares”. The issuance will not take effect without a separate resolution of the relevant class shareholders’ meeting, if only this provision regarding shareholders’ meetings is provided.
Thus, for example, in the case of a new issuance of shares of Class-A shares for third-parties allotment, Class-A shareholders cannot exercise their voting rights at the general meeting of shareholders, but they can exercise their voting rights at the subsequent general meeting of “class” shareholders to be held by A class shareholders.
However, even such rights to exercise voting rights to class shareholders meeting can be removed by stipulating additional provision as follows:

Article XX. In cases where the Company performs any of the acts listed in each item of Article 322, Paragraph 1 of the Companies Act, a resolution of a general meeting of class shareholders is not required, except as otherwise provided by law. In addition, the Company shall not require a resolution of a general meeting of class shareholders as provided in Article 199, Paragraph 4 and Article 238, Paragraph 4 of the Companies Act.

What cannot be restricted with Restricted Voting Rights Shares

As provided above, even though it is possible to almost eliminate all voting rights from the class shareholders who have restricted voting rights, there are some resolving matters which are mandatory to be passed at general meeting of class shareholders with restricted voting right:
1. Amendment of Articles of Incorporation regarding:
A. Creation of a new class of the shares;
B. Change in the features of the shares;
C. Increase of the Total Number of Authorized Shares, or Total Number of Authorized Shares in a Class.

Thus, with above example, if the company would like to create Class-B shares in addition to Class-B shares , it is mandatory to have Class-A shareholders meeting; in order make the resolution effective.

MK @ 12/09/2022