Update on discussions in the Financial Services Agency’s Working Group for Large Shareholding Reporting Rule (Nov.)

The working group (WG) discussed the scope of the "Making Important Suggestion" in relation to large shareholding reporting rule.

Summary
Most WG members agree that the scope of "Making Important Suggestion" should be further limited and clarified. The proposal to clarify the scope by focusing on the "content of the suggestion", "purpose of the suggestion" or "manner of the suggestion" is under discussion.

Current Rule
Under the Financial Instruments and Exchange Law (FIEL), when an investor holds more than 5% of the shares, etc., of a listed company, the investor needs to file a large shareholding report to the head of the relevant financial bureau. The FIEL allows special exemptions for financial instruments business operators (institutional investors such as banks, securities companies, insurance companies, investment advisors, etc.) to relax the frequency and deadline for filing large shareholding reports. However, the exemption does not apply when an investor makes a "Making Important Suggestion" to companies. The key question is what constitutes a "Making Important Suggestion".

In this regard, the Stewardship Code in 2014 provides the following guidance on the interpretation of ""Making Important Suggestion".

(i)   Request for explanation of management policies, etc.
(ii)  Explanation of voting plans, etc.
(iii) Request for company’s answer to (ii)
(iv) Asking questions at the general shareholders meeting
(i) to (iv) are unlikely to fall under the scope of "Making Important Suggestion".
(v)  Request for a resolution on specific matters at the general shareholders meeting
(vi) Request for a change in management policy, etc.
(v) and (vi) are likely to fall into the scope of "Making Important Suggestion".
However, (vi) may not be applicable depending on the manner.

The following points have been raised to above.
・The scope of "Making Important Suggestion" is still broad. If a proposal is made regarding capital strategy or business plan, it may be considered "Making Important Suggestion".
・Investors cannot precisely deliver their intention to companies because it is only possible to communicate issues indirectly through questions to the companies.

WG’s Discussion
(i)  Should the scope of "Making Important Suggestion" be limited or clarified?
(ii) If so, how should it be limited or clarified?

(i)  Most WG members agreed that the scope of "Making Important Suggestion" should be further limited and clarified.
(ii)  The WG members discussed a proposal to further limit or clarify the scope by focusing on "content of the suggestion", "purpose of the suggestion" or "manner of the suggestion".

Content of Suggestion
・ Pro argument: The items listed as "Making Important Suggestion" under the current FIEL is similar to the items to be required to resolve by the board of directors under the Companies Act, but the purpose is different, so there is no need to refer to the provisions of the Companies Act.
・ Con argument: It is difficult to clarify the scope of the proposals according to their content, as various topics are closely related in the engagement between investors and the companies with the aim of improving the company's value.

Purpose of Suggestion
・ Pro argument: Engagement of asset management companies, such as mutual funds and corporate pension plans with fiduciary duty, should not be considered Making Important Suggestion, because these asset management companies are not aiming to acquire management control.
・ Con argument: It is difficult to discern from purpose because the purpose is subjective to the parties.

Manner of the Suggestion
・ Pro argument: A suggestion for which the company has discretion as to whether or not to accept the proposal should not be a Making Important Suggestion. On the other hand, a suggestion that force or coerce a company to accept a suggestion should be considered a Making Important Suggestion.
・ Con argument: The provisions of the Foreign Exchange and Foreign Trade Act should be referred.

Other Opinions
・ There is a concern that some of investors will try to receive information through engagement that is not available to other shareholders. Limiting the scope of Making Important Suggestions would lead to a decrease in transparency.
・ The criteria should be the same as in the U.S., i.e., whether the purpose or effect is to influence the right to control the company.