Share Transfers in Japan: Transfer Approval to Shareholder Register

Transferring shares in an unlisted Japanese kabushiki kaisha (KK) usually requires company approval because of transfer restrictions in the articles of incorporation. The process runs in this order: a request for transfer approval, a decision and notice by the approving body, the share transfer agreement and settlement, and updating the shareholder register. Companies that issue share certificates must also deliver the certificates.

Overview of the share transfer process

A typical share transfer proceeds as follows:

1. Check the articles of incorporation and the shareholder register (transfer restrictions, approving body, whether share certificates are issued)
2. The transferor and transferee agree terms such as the number of shares, price and settlement date
3. The transferor (or the transferee) requests transfer approval from the company
4. The approving body decides and notifies the requester of the outcome
5. Sign the share transfer agreement and settle the price (a certificate-issuing company delivers the certificates)
6. The transferee asks the company to update the shareholder register
7. If officers change or similar, register the change

In practice, the parties often sign a share transfer agreement conditional on approval first, then settle once approval is obtained. The order depends on the relationship between the parties and the size of the deal.

What to check in the articles of incorporation

Before starting, review the company’s articles of incorporation. Most unlisted Japanese companies provide in their articles that share transfers require company approval. Such shares are called “restricted shares” (譲渡制限株式).

• Whether share transfers require approval, and who approves
• Whether the articles provide for the issue of share certificates
• Whether there is a provision for demanding that heirs and others sell shares to the company
• Whether the notice period for approval is set shorter than two weeks

Shares that pass by inheritance or merger are not transferred, so company approval is not needed. Instead, if the articles so provide, the company can demand that heirs and others sell the shares to it. This mechanism prevents shares from scattering to people who are not involved in the business.

At this stage, also check that the shareholder register matches reality. Problems such as past transfers never recorded in the register, or nominee shareholders, can obstruct later transactions.

Approval procedure for restricted shares

Who makes the request

The shareholder transferring the shares may request approval (Article 136 of the Companies Act). The acquirer may also make the request, in which case, as a rule, it does so jointly with the shareholder recorded in the register (Article 137). The request states the number of shares to be transferred and the name of the transferee. If the requester wants the company or a designated purchaser to buy the shares if approval is refused, the request must say so.

Who approves

Once the approving body has decided, the company notifies the requester of the decision. Always prepare and keep minutes of the resolution as evidence of approval. Even in a single-shareholder company, keeping written records rather than skipping the procedure makes later verification smoother.

Deemed approval after two weeks

If the company does not give notice within two weeks of the request (or any shorter period set in the articles), it is, in principle, deemed to have approved the transfer (Article 145). This does not apply where the company and the requester have agreed otherwise.

If approval is refused

If the company refuses and the requester has asked for a purchase, the company itself or a purchaser it designates buys the shares. The price is set by negotiation between the parties, and if they cannot agree, either may petition the court to determine it. Note also that when the company buys the shares itself, it can do so only within the financing restrictions of the Companies Act (the distributable amount).

What to set out in the share transfer agreement

Even for transfers within a family or of a small number of shares, we recommend a written agreement. In M&A, the following items are set out in detail:

• The class and number of shares, the price, payment method and settlement date
• Conditions precedent to settlement (transfer approval, licensing procedures, resignation of officers and so on)
• Representations and warranties (such as the financial position and the absence of unpaid tax, litigation or labor issues)
• Indemnification for breach of representations and warranties, and non-compete obligations

The transfer price is considered with reference to net assets, earning power, comparisons with similar companies and other factors. Valuation methods are explained in company valuation methods. A transfer at a price far from market value, for example between relatives, can give rise to gift tax, corporation tax or other tax consequences. Keep a record of the basis for the price.

Updating the shareholder register and perfection against third parties

In a company that does not issue share certificates, shares pass by agreement between the parties. However, unless the transfer is entered in the shareholder register, the transferee cannot assert shareholder status against the company or other third parties (Article 130). As a rule, the transferee requests the update jointly with the shareholder recorded in the register (Article 133).

In a certificate-issuing company, a transfer does not take effect unless the share certificates are delivered (Article 128). To assert shareholder status against the company, the shareholder register must also be updated. In a company whose articles provide for share certificates but which has not actually issued them, the validity of a transfer can be called into question, so consult a professional.

Shareholders of a company that does not issue share certificates can ask the company for a document certifying the matters recorded in the shareholder register. It is reassuring for the transferee to use this document to confirm that the register has been updated.

When registration is required

Shareholders are not a registered item, so there is no registration of the share transfer itself. However, if officers change in connection with the transfer, the change must be registered at the head office location within two weeks of the change. For registrations that require a shareholders’ meeting resolution, a shareholder list is attached to the application. If the register has not been updated, the shareholder list will not match reality, so update the shareholder register before registration.

When foreign officers or shareholders sign documents, a signature certificate issued by a notary or similar authority in their home country may be used instead of a Japanese seal certificate. These take time to obtain, so plan backwards from the settlement date.

Points to watch when foreign nationals or companies are involved

FEFTA notifications and reports

When a foreign investor acquires shares in an unlisted Japanese company, this may count as inward direct investment under the Foreign Exchange and Foreign Trade Act (FEFTA). Depending on the company’s business sector, a prior notification or a post-investment report is required. Even when acquiring shares from a foreign investor, prior notification may be needed depending on the sector. For details, see FEFTA inward direct investment explained.

Tax on capital gains

Shares treated like a business transfer (事業譲渡類似株式) refer to cases where, at any time within the three years up to and including the year of transfer, a shareholder group (specially related shareholders) held 25% or more of the issued shares, and 5% or more is transferred in that year. Many sales of a company by its owner-shareholders fall into this category, so check with a certified tax accountant (税理士) in advance. The buyer’s overall process is explained in how to acquire a Japanese company (M&A).

Share transfer procedure: summary

A share transfer in an unlisted company proceeds through checking the articles, transfer approval, the agreement and settlement, and updating the shareholder register. The approving body depends on the articles and the governance structure, and if the company does not give notice within two weeks, it is deemed to have approved. Without updating the register, the transferee cannot assert shareholder status against the company or third parties. Where foreign parties are involved, FEFTA and tax checks are also essential.

Working with partner judicial scriveners (司法書士), attorneys and certified tax accountants, TIMOA supports reviews of the articles and shareholder register, approval documents, share transfer agreements, FEFTA filings and registration of officer changes. For details, see M&A, Succession & Exit.