A common transaction in a group reorganization is the contribution by a company of assets other than monetary assets in exchange for shares in another company. Such a transaction would typically occur in an incorporation transaction or perhaps in the process of consolidating subsidiaries under a single parent company.
This transaction, in Japanese a genbutsu shusshi or 現物出資 and referred to below as a ‘Non Cash Capital Contribution’ or an ‘NCCC’, is regulated in Japanese corporate law with the principal objective of such regulation being the protection of shareholders and creditors from an undervaluation of the contributed assets. The transaction may also be ‘tax qualified’ where certain criteria are met, allowing deferral of gain or loss for the contributor.
Characteristics of a Non Cash Capital Contribution
The procedures for a company to issue shares in a NCCC transaction are the same as those for an issue of shares for cash except that, in principal, assets contributed have to undergo a valuation by a court appointed independent examiner (CL article 207 – all links to legislation in Japanese).
Furthermore, the directors bear a joint obligation for any undervaluation of the assets contributed, although if in a independent valuation is made then this obligation does not arise.
Fortunately there are exceptions to the obligation for an independent examination of a NCCC (CL article 207 9). The exceptions are as follows:
- Shares issued to the contributor of the assets are one tenth or less of the total number of shares in issue.
- The total value of the assets contributed is JPY5m or less.
- The assets contributed are marketable securities with a market price and the value recognized for the contribution is that market price or below.
- A certification has been received from a Japanese lawyer that the number of shares issued is appropriate.
- The assets contributed are monetary liabilities issued by the contributee company whose time for payment is falling due and the value of the contribution does not exceed the book value of the debts concerned. This would typically occur in a debt for equity swap transaction.
Procedures for a Non Cash Capital Contribution
A NCCC requires an ordinary resolution of the Board of Directors （取締役会の一般的決議）which has to include:
- The reasons for the contribution of assets other than the monetary assets.
- The assets contributed
- The valuation of the assets.
Two weeks prior to the contribution of the assets an announcement must be made or notification given to shareholders of the type of new shares issued, their number, the amount for which they are issued, the date of payment and the method of subscription. Given the potential prejudice to other shareholder’s position from the transaction it is also necessary to announce or notify the reasons for the contribution being made in assets other than cash.
Where the contributee company has limitations in its articles on the transfer of its shares (株式の譲渡制限を定款に定めている場合) then in addition a special resolution in a shareholder’s meeting is also required (株主総会の特別決議).
Assets and liabilities subject to the NCCC should be transferred to the contributee prior to the end of the period for allotment of shares (申込期日までに). The means by which the assets and liabilities are transferred will depend on their underlying nature (whether physically or by novation etc), however in the case of real estate all required documents need to register the transfer of the real estate concerned should be transferred to the contributee company prior to this date in order to ensure the transfer is effective.
Responsibilities of directors
Responsibilities of the directors in a NCCC transaction include the following:
- When the actual value of the assets contributed in the NCCC is clearly below the value of the share issued determined at the required Board of Director’s meeting, then those directors that voted for the contribution will be jointly liable to the company to pay any insufficiency in value (CL article 213-1).
- When the actual value of the assets contributed in the NCCC is clearly below the value of the share issued determined at a Shareholder’s Meeting then those directors that presented the proposal for the contribution will be jointly liable to the company to pay any insufficiency in value (CL article 213-1).
- When an independent examination of the value of the contributed assets has been made, then directors (those that did not contribute the assets themselves) are not labile to pay any insufficiency in value. (CL article 213-2).