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ACGA decries effect of private placements on minority shareholders

GLOBAL - The mandatory annual renewal of shareholder approval for third-party allotments is critical for the equal treatment of all shareholders and the protection of minority shareholders’ interests, according to the Asian Corporate Governance Association (ACGA).

The association said recent events in the Japanese corporate sector - such as the scandal at Olympus - had highlighted weaknesses in the system regulating third-party allotments, or private placements, and their potentially adverse effect on minority shareholders.

It said: “Many listed Japanese companies have taken up the cause of corporate governance reform in recent years. However, the current system of third-party allotments in Japan is against the spirit of good corporate governance, and most investors would not look favourably upon companies that continue to exploit it.

“We urge Japanese authorities to consider a stronger regime governing such capital-raising transactions.”

As the ACGA has previously pointed out in its 2008 ‘White Paper on Corporate Governance in Japan’ and in its ‘Statement on Corporate Governance Reform in Japan’ from 2009, issuing shares for cash to a select group of investors through a third-party allotment is potentially unfair to shareholders not invited to participate.

Depending on how market prices move, they can suffer dilution from both the new shares issued and the discount at which they are issued.

It can also abruptly change the ownership structure of the issuing company.

For this reason, both regulations and best practices have evolved in other global markets that put tight restrictions on such issuances.

According to the ACGA, these include:

• Shareholder approval of mandates that allow directors to place new shares at any time within the following 12 months.
• A limit on the amount of new shares that can be issued - as a percentage of existing share capital - to 5-10% or less in any 12-month period.
• A 5-10% limit on the discount at which the new shares can be issued.

However, the listing rules of the Tokyo Stock Exchange (TSE) do not require companies to seek annual shareholder approval for third-party allotments, while allowing them to issue as much as 25% of existing share capital.

If a company were to take full advantage of the current rules, this means it could bring in a new major shareholder who would have a decisive say on management without any input from other existing shareholders.

That clearly would be adding insult to their injury from potential dilution, according to the ACGA.

The association’s membership comprises major global pension funds and asset managers that manage $10trn (€7.7trn) in assets, as well as highly regarded Asian listed companies, intermediaries and tertiary institutes.

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