Squeeze-out Minority Shareholders by Consolidation of Shares

Squeeze-out Minority Shareholders by Consolidation of Shares

A consolidation of shares is method of reduce the number of shares issued.(e.g., 10 shares to 1 share, 3 shares to 1 share, etc.)
As a result of a consolidation of shares, shareholders holding less than one share (fractional unit shareholders) lose the right to exercise their voting rights.

A consolidation of shares method is sometimes used by listed companies, in order to raise the share price (increase the unit price of shares by making them less tradable).

On the other hand, this method is also used for the purpose of squeeze-out of minority shareholders.
For example, under situation when a minority shareholder has a personal grudge against the managers of the company, so persistently asks questions at the shareholders’ meeting to disrupt the meeting or files a suit to revoke the resolution of the shareholders’ meeting in order to harass the management.
In such case, even if the company offers to purchase their shares to relinquish their positions as shareholders, few of them would voluntarily agree to do so.
Therefore, as a last resort, a consolidation of shares procedure is used to forcibly remove such shareholders.

*It is not possible to consolidate the shares of a specific shareholder.
*A consolidation of shares must be approved by a special resolution at a general meeting of shareholders.
Therefore, if you do not have more than 2/3 of the voting rights, you need to find other shareholders who agree with you.

Since a consolidation of shares is a procedure that has a strong influence on shareholders, the Japanese Companies Act has provisions to protect minority shareholders.
If the procedure is used for the purpose of a squeeze-out, careful handling is required and a petition to the court is necessary if the procedure is to proceed.
Thus, if you are in any hurry to acquire treasury stock, it is recommended to consult a lawyer as soon as possible to take the necessary measures.

Procedures for Consolidation of Shares

*Below is the procedures when the fractions of less than one share is produced.
*If a company meets both of following condition, process with “☆” is not required. 
(i) Established a “share unit”
(ii) The share unit x ratio of the consolidation = No fractional shares less than one share.

1. Resolution of the Board of Directors

The matters to convene a general meeting of shareholders, including the matters of the agenda and proposals for the meeting shall be resolved.
In addition, a resolution regarding the purchase price of fractional shares, etc. shall be made in advance at this meeting.

2-1. Sending of Notice of Convocation of General Meeting of Shareholders

In the case of a private company with a Board of Directors, unless otherwise stipulated in the Articles of Incorporation, the notice shall be sent out at least one week prior to the date of the shareholders’ meeting.

2-2. Notice in accordance with Article 181, Paragraph 1 of the Companies Act

Notice of the contents to be resolved at the general meeting of shareholders (See below 4) shall be sent at least 20 days prior to the effective date of the consolidation.
In practice, the notice is sent once together with the notice of above 2-1.
It is advisable to send the notice by a method with high evidentiary value, such as “content-certified mail” (Naiyou-shoumei Yuubin), in order to prevent opposing shareholders from claiming that they have not received the notice.

Although it is possible to give this notice by public notice, it is highly recommended to give individual notice in order to avoid problems later.

In cases where:
(i) a “share unit” has been established and
(ii) The share unit x ratio of the consolidation = No fractional shares less than one share,
it is sufficient to send the notice at least 2 weeks prior to the effective date of consolidation.

3. Disclosing of Documents in Advance Regarding Consolidation of Shares (☆)

Documents or electromagnetic records containing the following information shall be kept at the head office.

Period of the documents to be disclosed:
The document shall start disclosed whichever earlier between
(i) 2 weeks prior to the date of the shareholders’ meeting
or
(ii) the date of notice to shareholders and for 6 months after the effective date of consolidation.
* In general, it takes place on the same date as either above 1 or 2.

4. Resolutions of the General Meeting of Shareholders

The following matters shall be resolved by special resolution at the general meeting of shareholders. The directors will be obliged to explain the reasons for the consolidation of shares at the meeting.
a. Ration of consolidation
b. Effective date
c. Class of shares to be consolidated (if the company is issuing class shares)
d. Total number of shares authorized to be issued as of the effective date

Important: Minority shareholders who are subject to such squeeze-out may participate in this shareholders’ meeting, and there is a possibility of a violent confrontation between those in favor and those opposed the resolution.
Therefore, in order to avoid such situation, it is necessary to set a purchase price of the fractional shares that is acceptable to minority shareholders and take measures to provide sufficient explanations to them.
If the meeting is still expected to get rough, it is recommended to ask a lawyer to attend the meeting.

5. Effective Date of Consolidation

As of the effective date, the number of shares held by each shareholder will be:
The consolidation shares ration x the number of shares held the day before the effective date.
Also, if the total number of authorized shares is changed by a resolution of the general meeting of shareholders, the Articles of Incorporation shall be deemed to have been amended accordingly.

6. Post Disclosing of Documents Regarding Consolidation of Shares (☆)

Documents or electromagnetic records containing the following information shall be kept at the head office.

Period of the documents to be disclosed: 6 months from the effective date

7. Registration

In the event of a consolidation of shares, an application for registration of a change in the number of issued shares (or the total number of authorized shares if there is a change) must be filed within two weeks of the effective date.

8. Purchase of Fractional Share

The following procedure is used to purchase the fractional shares.
I. Sum up all fractional shares and round down any fractional shares resulting from the total.
E.g.) Shareholders A, B, C, D, E 0.5 shares each
　　0.5+0.5+0.5+0.5+0.5 = 2.5 → 0.5 is rounded down

II. Exchange the number of shares remaining in (I) above for money (in principle, the shares are to be auctioned off according to the law, but it is often purchased by the company with permission of the court, when the company is privately held company)
E.g.) 2 shares are auctioned / purchased by the company → 3,000,000 JPY

III. The money mentioned in (II) above is delivered to the shareholders in proportion to the fractional shares.
E.g.) 3,000,000 yen x (0.5/2.5) = 600,000 JPY

Procedures to be Taken by Minority shareholder

A minority shareholder who oppose the consolidation of shares can take the following actions.

A. Request for an injunction against consolidation of shares (☆)

If the consolidation of shares is in violation of laws, regulations, or the Articles of Incorporation of the company, the shareholders can request the company to stop the procedures.
E.g.) If the company fails to give a specific shareholder the notice described in 2-2 above.

B. Request for buyout by dissenting shareholders (☆)

A shareholder who meets all of the following conditions may demand that the company purchase fractional shares less than one share at a fair price.
(i) Give notification to the company prior to the general meeting of shareholder.
(ii) actually oppose the proposal at the general meeting of shareholder.

~Procedures for the buyout request~
The company and the shareholders will hold discussions for 30 days from the effective date.
If no agreement is reached within 30 days, the company or the shareholders may file a petition to the court for a determination of the price.

MK@ 06/12/2022