New restricted stock
On April 28, 2016, Japan’s Ministry of Economy, Trade and Industry (METI) published a Guidebook for Introducing New Stock Compensation (restricted stock) as Board Members’ Compensation to Encourage Companies to Promote Proactive Business Management.
Restricted stock is a type of incentive compensation to executives in the form of stock, which they are prohibited from disposing of for a certain period of time.
Amendments to Japanese tax laws effective April 1, 2016 made the issuance of restricted stock to executives permissible where:
- The issuing corporation can claim the compensation as a deductible expense; and
- It is a taxable event to executives when they are able to dispose the shares of the stock.
There is a general sentiment in the business community that executives of Japanese corporations receive much lower compensation (especially long-term equity incentives) compared with their counterparts in western countries. Some authorities have also argued that under the current Corporations Act of Japan, it is difficult to issue shares without consideration, even as executive compensation.
Issuance of restricted stock to executives recently made permissible under the new Japanese regulations is intended to resolve these concerns. Although there will still be some issues that need to be addressed (as described below), it is expected that many Japanese corporations could introduce restricted stock in the near future.
To address concerns under the Japanese regulations, restricted stock will be issued through the following steps:
- The issuing corporation will provide executives with credits (i.e., monetary claims) as compensation for their services.
- The executives will give these credits to the issuing corporation in exchange for restricted stock.
Since restricted stock will be issued in exchange for the credits, it is expected that their issuance will be treated as an offering of securities under Japanese securities regulations. Depending on the amount of the compensation, the issuing corporation will be required to disclose the issuance of the restricted stock by filing the Securities Registration Statement (SRS), which is similar to Form S-1 under US regulations. However, more relaxed disclosure will generally be made available to listed companies in Japan. Furthermore, under current securities regulations, it is necessary to disclose names, addresses and other information of the executives who will receive the restricted stock. The Japanese government is now considering amending the securities regulations so that the disclosure of such private information of the executives will not be required. Thus, the securities disclosure obligations would not be an impediment to Japanese listed corporations that are hoping to utilize restricted stock.
On the other hand, in many countries, local securities authorities seem to be taking the view that offering restricted stock to executives for no consideration should not be treated as an offering of securities requiring registration or disclosure. The manner in which restricted stock under the new Japanese regulations will be issued to executives in exchange for credits to the issuing corporation is a relatively unique concept, not seen in similar schemes in western countries. If a corporation is considering the provision of restricted stock to executives outside Japan, it is important to understand the disclosure and other requirements under local regulations in advance.