Overview of Share Option in Japan

In Japan, “Share Option” means any right which entitles the holder to acquire shares in a Stock Company by exercising the right against such Stock Company (Companies Act Article 2, Item 21).

A company issues share option to individuals or corporations with or without payment, and holders of the stock options can become a shareholder on the date of exercising the rights by paying the exercise price within a predetermined period.

General Benefits of Share Option

Although share option can be used for a variety of purposes, the general principle benefits are as follows.

For Example
Company A grants B a share option for free with a condition which if B exercises the right at an price of 100,000 yen, B will be entitled to receive one share of common share of Company A.
In this condition, when the market value of one share of common share of Company A will become 1,100,000 yen four years later, B can pay the exercise price of 100,000 yen, thereby earning the difference of 1,000,000 yen.
Conversely, if the market value of the common stock has fallen to 50,000 yen per share, B would not lose money because he can continue to hold the share option without exercising it, in the hope that the market value would rise again.

In this way, share options are different from the issuance of new shares by shares allotment, which requires payment of capital from at the time of the issuance, while share options can on hold the payment of exercised price by watching the fluctuation of the market value of the issuing company.

Main Uses of Share Option in Japan

The share option has not yet familiar to the general corporate sector in Japan, and most of the companies that use the system are either publicly listed companies or companies that are aiming to go public.

The main uses of share options in these companies are as follows.

(i) Stock options

In Japan, “Stock options” is used as a method of increasing incentives for company officers and employees by granting share options. In other words, stock options are issued with the aim of boosting the motivation of officers and employees to work harder for the company, since the higher the corporate value, the higher the share price, and the more profit is returned to the stock options holders.
When issuing stock options, it is very important to consider whether the stock options are tax-qualified (non-tax-qualified stock options have the disadvantage of being taxed twice, upon exercise stock options and upon sale of the shares, with higher tax rates). Therefore, it is strongly recommended to consult with a tax consultant when you make a plan on the issuance requirements.

(ii) Financing

A well-known example is convertible bonds with share options, a combination of share options and corporate bonds (*).
The advantage for a company to issuing this type of share option is that, whereas a normal capital increase would require a valuation process, issuing a convertible bond with share option can postpone the process so the company can raise funds quickly.
For an investor’s advantage, it is possible to convert the share option into shares at a time when the share price is rising. In such a case, if the bonds (= claims against the company) can be invested as payment for the exercise price, there is no need to pay any additional money, etc to the company. Conversely, if the share price has fallen, it is possible to receive interest payments on the interest payment date by continuing to hold the bonds , also it can be held until the redemption date to receive a refund of the redemption proceeds.

*Definition of “Corporate bond”: Any monetary claim owed by a Company by allotment under the provisions of this Companies Act and which will be redeemed in accordance with the provisions on the matters listed in the items of Article 676. (Companies Act Article 2, Item 23)

(iii) Takeover defense

This method is sometime used in a listed company as a countermeasure against shareholders (acquirers) who are buying up the company’s shares. In the method, a pre-caution is given to shareholders that share options will be issued on the condition that the shareholding ratio of the acquirer exceeds XX% or more, and upon hitting the limit, the share option are allocated for free with the condition of “only shareholders who are not holding more than XX% of the company’s shares may exercise the rights.
However, since this type of takeover defense may violate the principle of shareholder equality, it is advisable to consult with an attorney or other legal counsel in advance.

In addition to the above, there are various other uses for share options and will still be developed in the future.

MK@07/10/2022