MK @ Legal Biz Leaf Issuance of Shares through a Third-party Share Allotment
A share allotment is a possible way for a Kabushiki-Kaisha (KK) to financing their capital.
It is a procedure whereby a company issues either new shares or distribute treasury shares in exchange for additional capital contributions from investors including a parent company of a foreign corporation.
There are two basic methods of a share allotment as follows.
- Shareholder allotment: A method to grant all existing shareholders to be allotted shares in proportion to their shareholding ratio. This method has the advantage of raising funds without significantly changing the composition of shareholders. On the other hand, it is usually not used as often as the third-party allotment because the procedure is more complicated.
- Third-party allotment: All other method than a shareholder allotment. Even if the all allotment is granted to existing shareholders (in effect it is shareholder allotment), it is possible to use this method instead of the shareholder allotment. This method is overwhelmingly used because the procedure can be completed in as little as one day.
Overall Flow of a Third-Party Allotment
*Procedures below are for a private company, contribution via cash, third-party allotment by subscription without concluding the contract for subscription for the total number of the shares.
1. Resolution of a Board of Directors’ meeting: Determination of convening a meeting
(For company without Board of Directors: Determination by a majorities of directors)
2. Convocation Process
3. Resolution of general meeting of shareholders by special resolution: Determination of subscription requirements, etc.
4. Notification to shareholders about the subscription requirements, etc.
5. Applications for shares allotment
6. Resolution of the Board of Directors: Determination of allottees
(For company without Board of Directors: resolution of the general meeting of shareholders by special resolution.)
7. Notification to subscribers about the allotment
8. Fulfillment of investments
9. Application for registration
* In practice, the decision on the allottee in 6 above is made in advance at the time of the resolution in 1 above (or 3 above for the company without Board of Directors).
Determination of Subscription Requirements
The following matters shall be determined in the resolution of the general meeting of shareholders (See 3 above).
1. The number of Shares (or class and number) for Subscription
The number of shares may be determined within the range not exceeding the total number of shares authorized to be issued that is stipulated in the Articles of Incorporation. If the number of shares to be issued exceeds the total number of shares authorized to be issued, the Articles of Incorporation must be amended by a special resolution of the general meeting of shareholders simultaneously.
2. The Amount to be Paid in (per share) or its calculation method
The amount to be paid in can be stated as follows.
Example 1: 100 yen per share
In the case where 800 shares are to be issued with a payment amount of 10,000 yen, “12.5 yen per share” may be stated with a fractional amount.
Example 2: 100 yen per 3 shares
If the amount is not divisible, it may be stated as above.
Example 3: 10 USD per share
If the investment is to be made in a foreign currency, it may be stated as above.
3. Statement that non-monetary assets will be invested, and details and value of such assets (If applicable)
Investors may also invest in real estates, securities, claims against the company, etc.
Example: Land in XXXX Koto-ku, Tokyo, valued 10 million yen
4. Due date or due period of the payment or delivery
When a specific date is set as a due date, all investors including those who have paid in the capital in advance will become shareholders on the due date.
When a period of time is set as a due period, the shareholder will become a shareholder on the date of payment or delivery of the assets during the said period.
* The company may use the investment capital from the effective date (the date when the subscriber becomes a shareholder). Until then, the capital contribution is treated as an application deposit.
Note: If the money is not received in the remittance account within the due date/period, the right to become a shareholder is forfeited.
It is not enough to wire the money into account, but the money must be received by the company by the end of due date.
Point: Especially in the case of remittance from overseas, there is a possibility that the payment will not be made on time due to problems with remittance, etc. Therefore, it is advisable to set a time frame that allows for a sufficient amount of time.
Also, due to remittance fees, exchange rates on the payment due date, etc., it is possible that the amount of investment may not reach the required amount.
In such a case, the shares will not be issued for the shortfall, so it is advisable to pay more than the stipulated amount just in case.
5. When issuing shares, matters related to the capital and capital reserves that is to be increased.
The amount not exceeding half of the amount of the contribution may not be recorded as stated capital and can be recoded as capital reserves instead.
Most companies take advantage of this half-accounting system to avoid the disadvantages of Japanese size-based business tax, (Corporate income tax levied on the amount of stated capital).
For Example:
- Current stated capital: 500,000 yen
- Additional capital contribution of 1,000,000 yen to be made
1. If the amount of capital is set at 500,000 yen and the amount of capital reserve is set at 500,000 yen, the stated capital after registration will be 1,000,000 yen. (500,000 + 500,000 yen)
2. If the amount of capital is set at 700,000 yen and the amount of capital reserve is set at 300,000 yen, the stated capital after registration will be 1,200,000 yen. (500,000 yen + 700,000 yen)
Contribution of capital of foreign currency
In the case of remittance of foreign currency from overseas, the amount of capital may not be exactly the same as the amount of capital stipulated at the shareholders’ meeting due to the effect of the exchange rate.
* Exchange rate on the “effective date” (the due date of payment if stated the date/ the date of actual payment within the due period if stated the period) is used as an amount to be recoded as the capital.
In anticipation of such a situation, instead of passing a resolution for a specific amount, it is often stipulated as follows.
“The amount of increase in capital shall be the amount obtained by multiplying the maximum amount of increase in capital as stipulated in Article 14, Paragraph 1 of the Regulation on Corporate Accounting by 0.5 (fractions are rounded up), and the remainder shall be recorded in the amount of capital reserves”
For Example:
Stipulating the subscription requirement as follows at the the general meeting of shareholders.
- Issue 10 shares at 1 USD per share
- Exchange rate at the time of the meeting 1USD = 100 yen; Assuming 1000 yen to be the contributing amount
A: “Amount of capital: 500 yen Amount of reserve: 500 yen
B: “The amount of increase in capital shall be the amount obtained by multiplying the maximum amount of increase in capital as stipulated in Article 14, Paragraph 1 of the Regulation on Corporate Accounting by 0.5 (fractions are rounded up), and the remainder shall be recorded in the amount of capital reserves”
On the day of the payment date, with the exchange rate of 1USD = 150 yen, the equivalent of 1,500 yen was paid in.
Whether it is possible to record the amount of paid-in capital as 750 yen and the amount of capital reserve to be 750 yen?
→ In case of stating as A above: Not possible
→ In case of stating as B above: Possible
MK@ 06/19/2022
