Exercise of Share Options, etc.

Share Option Registry

A Kabushiki-Kaisha that has issued Share Options shall prepare a Share Option Registry without delay after the day Share Options are issued, and shall state or record the matters stipulated in Companies Act Article 249 in the registry.
In particular, it must be aware when Share Options Certificates have not been issued, a person who acquires Share Options by transfer cannot claim their rights against the issuing company or a third party unless the matters are stated or recorded in the registry.

The matters to be stated or recorded when Share Options Certificates are not issued (and those are rarely issued in practice) are as follows.
1. The names and addresses of the holders of Share Options
2. The features and number of the Share Options held by the holders of Share Options referred to in 1 above.
    *Generally, the name of the Share Options (e.g., “Series 1 of Share Options”), the number and type of shares to be issued upon exercise of the Share Options, and the exercise price will be briefly described.
3. The days when the holders of Share Options referred to in 1 above acquired the Share Options.
4. Other Matters : An information such as the fact that certificates are not issued may be written in the remarks column.

Exercise of Share Options

Intention to exercise the right

Holders of Share Options may acquire the shares underlying the Share Options by expressing their intention to exercise their rights with following matters within the exercise period (Companies Act, Article 280).
1. The features and number of the Share Options to be exercised
    * It is often written in a concise manner to the extent that the Share Options can be identified (e.g., the name of the Share Options).
2. The day on which the Share Options will be exercised.　

Payment of the exercising price

The Share Options holder shall complete the payment of the exercising price to the payment location predetermined by the Company, on or before the above-mentioned date.
Unlike at the time of issuance, the amount to be paid cannot be set off against any claims against the Company at the time of exercise of the Share Options, unless if it was stipulated at the time of issuance.

Fractional number

If the exercise of the Share Options results in the issuance of a fractional number of shares, the company shall pay the fractional amount in one of the following ways in accordance with Article 283 of the Companies Act. However, this provision shall not apply if it is stipulated that any fraction of a share shall be rounded down to the nearest one share at the time of issuance of the Share Options.
(i) In cases where such shares are shares with a market price: The amount calculated by the method prescribed by the applicable Ordinance of the Ministry of Justice as the market price of one such share.
(ii) In cases other than the cases listed in the preceding item: The amount of net assets per share.
Upon completion of the above procedures for investment, the holder of the Share Options will become a shareholder of the underlying shares on the date of exercise.

Acquisition of treasury Share Options

If the company has stipulated an acquisition clause as contents of the Share Options, it may acquire all or part of the Share Options subject to the occurrence of certain events. *Unlike the acquisition of shares, there are no financial resource restrictions on the acquisition of Share Options.

In cases where the particular events for the acquisition are stipulated

For Example: The day an employee retires　
Effective date of acquisition: Date of such retirement

In cases where the company is supposed to stipulate the particular events for acquisition

The company shall pass a resolution at a general meeting of shareholders (or at a meeting of the Board of Directors in the case of a company with a Board of Directors) to specify the acquisition event and notify or publicly announce it to the Share Options holders.

For Example: The date on which an employee retires.
Effective date of acquisition: The later of the following dates
A) Date of such retirement
B) The date two weeks have elapsed from the date of the notice or public notice from the Company.

In the event that the company stipulates that a portion of the Share Options shall be acquired by the company

The company shall pass a resolution at a general meeting of shareholders (or at a meeting of the Board of Directors in the case of a company with a Board of Directors), stipulate the Share Options to be acquired, and notify or publicly announce such to the eligible Share Options  holders.

For Example:  Share Options of employees A and B are to be acquired on a date of their retirement.
Effective date of acquisition: The later of the following dates
A) The date of the retirement of Employees A and B
B) The date two weeks have elapsed from the date of the notice or public notice from the Company

Cancellation of Share Options

Once the company acquire their own Share Options, it may be cancelled by a decision of the Directors (or by a resolution of the Board of Directors in the case of a company with a Board of Directors), by specifying the features and number of own Share Options to be cancelled.

Extinguishment of Share Options

In the event that a Share Options can no longer be exercised definitively, such Share Options will be extinguished without following any procedures.
For Example: Extinction due to an expiration of the exercise period

Abandonment of Share Options

It is possible for holders to waive their Share Options by their own will.
Many companies that issue stock options often obtain a letter of waiver of Share Options when an employee leaves the company to avoid any doubts later on.
This is because there is an argument that if it is stated “being as an employee is a condition for exercising stock options”, and such employees return to their positions after they resign the company once, it is hard to tell whether the stock options will or will not exercisable.

Extinguishment v.s. acquisition of treasury Share Options

For example, if the condition for exercising subscription rights is that “the employee must be an employee of the company at the time of exercise”, the company may have to apply for registration of extinguishment of Share Options every time the employee resigns.
In order to avoid such a situation, in practice, the company often stipulates that the company will acquire the Share Options if the employee is no longer able to exercise all or part of their rights.
Once the company has collected the Share Options, it may cancel its own Share Options at a timing determined by the company.

MK@ 07/21/2022