COVID GOVERNANCE
Corporate issues amid COVID-19

Holding shareholder meetings, creating quarterly financial reports, conducting audits, and disclosing required documentation to meet company law obligations is stressful at the best of times. The COVID-19 pandemic has brought a fresh set of challenges to companies to meet these obligations. Submissions and the necessary processes will be beset with delays. Remotely coordinating management, shareholders, and other stakeholders may prove difficult. This article outlines some of the issues companies in Japan may face, and discusses the government guidance thus far on these issues.

1.　Shareholder Meetings

1. Default Rule and Relaxation
   
   The Companies Act states that shareholder meetings must be held within a defined period after the fiscal year end. Through custom and practice, most shareholder meetings in Japan have been held within 3 months after the fiscal year end. And - because most Japanese companies have their fiscal year end in March - the standard practice is that the majority of shareholder meetings are held in June.
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   Given the current delays and uncertainties, the Ministry of Justice circulated a note that companies would not be expected to hold their shareholder meetings within this defined period in the circumstances. For companies that mandate a deadline in their articles of association, not holding shareholder meetings before the specified deadline will not breach the articles of association or company law.
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   In line with such a note, the government has requested businesses to consider postponing shareholder meetings. However, if they wish to go ahead, they can conduct “hybrid” half physical and half virtual meetings in addition to holding a physical meeting with precautionary measures as a default.
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2. Full Virtual?
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   To prevent the further spreading of COVID-19 and to mitigate health risks, there is a global trend of public companies adding a virtual component in conducting their annual shareholder meetings. At current, however, completely virtual shareholders’ meetings are not permissible under Japanese law.
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   In Japan, companies are required by the Companies Act to provide for and allocate a physical venue, even if some or all participants will attend virtually. Thus, virtual set-ups are supplementary to the default physical meeting. Companies can, however, call upon shareholders to refrain from attending physically in consideration of the health and safety of others.
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   The virtual attendance in itself will not mark a shareholder as “present” per se. Notably, the Ministry of Economy, Trade and Industry released a guideline on “Holding Hybrid Virtual Shareholders’ Meetings” to elaborate on the two ways that hybrid meetings may be held.
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   First, the ‘participating’ (“sanka”) model. Shareholders who attend virtually can listen and take notes, but cannot exercise their rights to ask questions or participate in the meetings. They will not be marked as having “attended” the meeting. In reality, the drafting of most company resolutions are effectively made prior to the meeting as shareholders exercise their vote in writing prior. This model is used so that shareholders have the opportunity to listen to management speak and discuss future directions for the company.
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   Second, the ‘attendance’ (“shusseki”) model. This would legally mark the shareholder as having attended the meeting. Notably, in March, Fuji Soft held an attendance model meeting, where participants pre-downloaded an app on an iPad that allowed them to exercise their voting rights.
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3. Options for Companies
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   1. Postponement
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      If companies decide to extend a deadline, they must still hold the shareholder meeting within a reasonable time.
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      Further, a shareholder’s voting rights are exercisable within 3 months from the record date of his/her share. This record date is usually set at the fiscal year end (i.e., for many Japanese companies, the record date is set at the end of March). Thus, for the same rights to be exercisable even if there is an extension, companies must amend and notify shareholders that the record date for them to be able to exercise their rights will be modified.
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      Similarly, shareholders’ rights to dividends are granted in relation to the same record date. And it is foreseeable that if the record date is not amended, a decision to pay dividends cannot be made within the prescribed period. In relation to this, the Ministry of Justice has noted that it is possible for companies to not pay out dividends within the period prescribed in the articles of association; but to prescribe a new date and pay out dividends based on the new date.
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   2. Going ahead with the Meeting
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      If companies decide to go ahead, as noted above, they can implement virtual methods and urge shareholders to refrain from physical attendance.
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      Even if companies go ahead and limit the numbers of those who attend physically, most companies would not have implemented measures to make it possible for shareholders to exercise voting rights virtually. Therefore, it is possible to have a ‘continued meeting’ (“keizokukai”) at a later date, and to pass resolutions in this continued meeting. On April 28 the government announced that, in consideration of the health and safety of stakeholders, it would be permissible to hold the continued meeting whenever it becomes possible, taking into account the required time to prepare for the settlement of accounts, conducting an audit and getting things in order to conduct the continued meeting.
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      While no given timeframe or deadline is given, it is recommended in the government announcement that continued meetings be held within 3 months from the date of the initial shareholder meeting.
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      A general consensus seems to be that most companies will go ahead with meetings, but with precautionary measures. There will be adaptations of some of the measures implemented by companies that had their fiscal year end in December, and held their shareholders’ meetings in February and March. Many prepared thousands of masks to hand out to attendees. After every shareholder spoke, microphones were sanitized. As noted above, Fuji Soft required participants to pre-download apps. We could see a proliferation of such innovative methods for shareholders’ meetings in the future. GMO Nikko made their meetings efficient by doing away with readings of the company’s financial performance, but instead asked participants to “read the handout”. The Ministry of Justice has also announced on May 15 that, for the shareholder meetings held in the next 6 months, it is permissible to disclose relevant documents to shareholders online, rather than physically handing out printouts. If some of these measures remain in a post-corona world, it would bring efficient changes to the way shareholder meetings are staged.

2.　Listed Companies’ Obligations

Delays in company processes, unpredictability in preparing financial forecasts, and the inability to conduct audits - especially for companies with global subsidiaries and affiliates in COVID-19 impacted regions - is already an impediment for listed companies to discharge legal obligations.

In light of the uncertainties caused by the COVID-19 pandemic, the government and the Tokyo Stock Exchange have advocated a flexible approach. They have called for extensions and an easing of disclosure and submission obligations under relevant laws.

1. Annual securities reports
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   Under the Financial Instruments and Exchange Act, listed companies must provide annual securities and internal control reports within 3 months from the fiscal year end. They must also submit quarterly financial reports within 45 days from the fiscal year end. Extraordinary reports must be submitted without delay, if any of the events or matters specified in the Act occur (e.g., any matters that have a significant impact on the finances and operations of the company, such as new managing directors being appointed).
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   With the current delays and uncertainties, on April 17, the Financial Services Agency circulated a cabinet ordinance that because of the COVID-19 pandemic they will amend the Financial Instruments Act. The amendment would automatically extend the deadlines for annual securities and quarterly financial reports until the end of September, 2020.
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2. Financial Statements
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   Under Tokyo Stock Exchange’s listing regulations listed companies must submit financial statements and financial forecasts within 45 days from the fiscal year end. Financial forecasts are usually made in relation to disclosed financial statements.
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   Tokyo Stock Exchange identified this issue early on and circulated a note in February stating that disclosure obligations could be extended until these documents were finalized by companies. However, because of the immense impact on companies’ operations, they have requested listed companies to disclose risks and potential effects on their businesses stemming from COVID-19 as soon as practicable.
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   At the end of April, 392 companies (appr. 16% of all listed companies in Japan) have announced delayed disclosures. Out of the 183 companies that have made disclosures in April, an unprecedentedly large number of 126 companies stated that their net sales forecasts were “undecided”.

(Written by: Dai Iwasaki, Tomo Greer)

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*This Newsletter is provided for educational and informational purposes only and is not intended and should not be construed as legal advice.
For more information and questions regarding this newsletter, reach out to us.

Contact：Dai Iwasaki　Tel: +81-(0)3-6273-3544 (Direct) E-mail: dai.iwasaki@tkilaw.com
Contact：Tomo Greer　Tel: +81-(0)3-6273-3310 (Direct) E-mail: greer.tomo@tkilaw.com