In Brief
The scope of the employee share plan exemption applicable to the offering of stock options and stock purchase rights has been significantly expanded, which should now enable most companies to rely on the exemption in offering equity awards to employees of their subsidiaries in Japan without having to file a securities notice or securities registration statement with the Japanese securities regulator.
Background
Under the Japanese Financial Instruments and Exchange Act (the “FIEA”), companies (including non-Japanese companies) offering certain types of equity awards, such as stock options or stock purchase rights under an employee stock purchase plan (“ESPP”), are generally required to complete onerous securities law filings with the securities regulator in Japan (the Kanto Local Finance Bureau), if the offer is made to 50 or more individuals in Japan in any 3-month period and the offering value is over JPY 10 million in any 12-month period. Awards granted without consideration (such as RSUs) are not generally subject to these filing requirements.
Specifically, a Form 6 securities notice must be filed for offers to 50 or more individuals where the offering value is between JPY 10 million and JPY 100 million. A Form 7 registration statement must be filed for offers to 50 or more individuals where the offering value is JPY 100 million or more. If the number of offerees is fewer than 50, the offer is considered a private offering and no filing is required.
If a company files a Form 7 registration statement, it also needs to prepare a Japanese prospectus based on the Form 7 and deliver it to eligible employees. Further, once a Form 7 registration statement is filed, the company becomes a “continuous disclosure company” for purposes of Japanese securities law, which requires the company to make additional filings on an ongoing basis, such as the annual report and semi-annual report on Form 8-2 and extraordinary reports on Form 10-2. These filings are complex and require coordination with the company’s auditors.
A self-executing employee share plan exemption from these filing requirements has been available but has been subject to three requirements: awards could be offered only to employees of a subsidiary of the issuing company in Japan which was (i) a first-tier or second-tier subsidiary of the issuing company, (ii) wholly-owned, and (iii) organized as a stock company (“kabushiki-kaisha” or “KK”).
Amendments Expand the Scope of Exemption
On February 21, 2025, the Cabinet Office of the Japanese government published an amendment to Cabinet Office Ordinance on the Disclosure of Corporate Affairs, which subsequently became effective on February 25, 2025 (the “Ordinance”).
Among other things, the Ordinance removed the three requirements listed above from the employee share plan exemption.
As a result, any company’s offering of stock options or stock purchase rights to officers and employees of its subsidiaries in Japan will now be exempt from the requirement to file a securities notice or securities registration statement under the FIEA.
To qualify as a subsidiary for this purpose, it will be sufficient that the issuer company hold a majority equity ownership (directly or indirectly) in the Japanese company. Indeed, there are instances where a Japanese entity can be deemed as a subsidiary of the issuer company even if the issuer company only holds a minority equity ownership (more than 40% but less than 50%). Further, subsidiaries in Japan that are not organized as KKs (such as “godo-kaisha” or “GK”) which were previously not eligible for the employee share plan exemption are now also covered.
We note that the text of the Ordinance is not entirely clear as to whether the expanded exemption also applies to the offering of stock acquisition rights by foreign non-Japanese issuer companies whose stock is not listed on a stock exchange or traded over-the-counter in Japan. However, after discussion with the regulator, they confirmed that the Ordinance is meant to also apply to non-Japanese issuer companies.
The Ordinance may not apply to equity awards which have features different from standard stock options or stock purchase rights.
Next Steps
Companies that have refrained from offering stock options or stock purchase rights in Japan, or limited the size of their offerings in Japan to stay under the 50-person or the JPY 10 million threshold, to avoid the filing requirements may now want to proceed with the offerings, provided that their affiliated entities in Japan are considered subsidiaries for purposes of the amended employee share plan exemption. To ensure all conditions of the amended employee share plan exemption are met, please contact your respective Compensation attorney for further analysis and guidance.
Companies that have already filed securities registration statements on Form 7 and are therefore continuous disclosure companies in Japan no longer need to file any securities registration statement for future offerings, provided they qualify for the amended exemption, but they still need to file extraordinary reports on Form 10-2 to report their global offering of stock options or stock purchase rights, the annual report and semi-annual report on Form 8-2 as well as any extraordinary report on Form 10-2 to report the occurrence of certain material events. It may be possible for continuous disclosure companies to discontinue this status by filing a petition for relief with the regulator, once certain conditions are met.
Please reach out to your respective Compensation attorney for further details.
